LOVELY PROFESSIONAL UNIVERSITYDEPARTMENT OF MANAGEMENT

“A Comparative analysis of Profitability and Productivity in Indian Banks with special reference to Public, Private & Foreign Banks.”

Submitted to Lovely Professional University

In partial fulfillment of the requirements for the award of degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by:

Vinay Kumar

2020070272

Supervisor:

Mrs. Ashima Thaper

Lecturer (Lovely School of Business)

DEPARTMENT OF MANAGEMENT

LOVELY PROFESSIONAL UNIVERSITY

PHAGWARA

1

(2009)

LOVELY PROFESSIONAL UNIVERSITY

DEPARTMENT OF MANAGEMENT

TO WHOMSOEVER IT MAY CONCERN

This is to certify that the project report titled, "A Comparative analysis of Profitability

and Productivity in Indian Banks with special reference to Public, Private &

Foreign Banks” carried out by Mr. Vinay Kumar, S/o Sh. Harjinder Singh has been

accomplished under my guidance & supervision as a duly registered MBA student of the

Lovely Professional University, Phagwara. This project is being submitted by him/her in

the partial fulfillment of the requirements for the award of the Master of Business

Administration from Lovely Professional University.

His dissertation represents his original work and is worthy of consideration for the award

of the degree of Master of Business Administration.

Mrs. Ashima Thaper

(Name & Signature of the Faculty Advisor)

Title: “A Comparative analysis of Profitability and Productivity in Indian Banks

with special reference to Public, Private & Foreign Banks.”

Date: ______________________________

2

Date:

LOVELY PROFESSIONAL UNIVERSITY

DEPARTMENT OF MANAGEMENT

DECLARATION

I, "Vinay Kumar”, hereby declare that the work presented herein is genuine work done

originally by me and has not been published or submitted elsewhere for the requirement

of a degree programme. Any literature, data or works done by others and cited within this

dissertation has been given due acknowledgement and listed in the reference section.

Vinay Kumar

(Student's name & Signature)

2020070272

(Registration No.)

Date: __________________

3

LOVELY PROFESSIONAL UNIVERSITY

DEPARTMENT OF MANAGEMENT

Suggestive Cha

S.No Chapter Page No.

1 1.1 Introduction to Subject

Productivity

Aspects of productivity

Profitability

How banks uses the profitability analysis

1.2 Objective, Need, Scope & Methodology

2

2-4

5

5-8

9-13

2. 2.1 Introduction to Indian Banking

2.2 History

2.3 Banking system in India

2.4 Banks in India

2.5 The status of the banks in India as on December 2008

15-16

16-19

20

21-26

26-28

4

3 Survey of Literature 30-33

4 Analysis of the profitability and productivity of Public sector

banks vis-à-vis with Private sector banks and Foreign banks

35-71

5 Findings, Conclusion, Limitations & Recommendations 73-81

6 Bibliography

7 Appendix

5

Executive summary:

The new millennium has brought along challenges and opportunities in the various fields

of economic activities including banking. The entry of various private sector and foreign

banks exposed the inefficiencies in the public sector banks. . Indian banking, which was

operating in a highly comfortable environment till the beginning of the 1990s, has been

pushed into the choppy water of intense competition. The modern banking activity is

marked by itineraries into un-chartered horizons mingled with risks and heavy

competition. Immediately after nationalization, the Public Sector Banks spread their

branches to remote areas at a rapid pace Their main objective was to act on behalf of the

government to fulfill economic obligations towards the common man. They acted over

enthusiastically in penetrating into far-flung and remote corners of the country. The

social responsibility that was entrusted upon the Public sector Banks digresses them from

the profit motive. On the other hand private and foreign banks did not make such moves.

Instead, they pursued profit making as the objective for their operations.

In 1992 the RBI launched banking sector reforms, as per the recommendations made by

the Narasimhan Committee on financial reforms to create a more profitable, efficient and

sound banking system. The reforms opened the banking sector for private players.

Domestic private sector banks are divided into two categories old banks which existed

with the public sector banks before the entry deregulation and the new banks that came

into existence after the reforms of 1992. The old banks are smaller in size and are

regional. In contrast the new private sector banks are much larger in size, operate

primarily in metros and are technologically superior. Interestingly, unlike many

developing countries, where the government owned financial institutions own major

equity of the private banks, the equity share holders of the old private sector banks were

mainly non government bodies. However, most of the new private sector banks, in India

6

are promoted by the government owned financial Institutions. These banks, too, are in the

process of reducing promoter’s stake by raising funds through the capital market

represents the banking system in India.

The emergence of New Private Sector Banks in 1995 exposed the inefficiencies of the

public sector banks. New Private Sector Banks have set a blistering pace of growth,

easily beating the growth rate of Public Sector Banks. The business share for Private

Sector Banks is very small but their share in the total net profit of the banking system is

disproportionately high. Just like in any other business, profit in banking acts as a

stimulant factor for management to expand and improve their services. Though Profit

maximization is secondary for Public Sector Banks, adequate profit is necessary for their

survival and healthy operations because even socio-economic obligations, like branch

expansion in rural areas and priority sector advances cannot be fulfilled without adequate

profit.

Objectives of the study

1. To compare the profitability and productivity of the public sector banks vis-à-vis

with the private sector banks and foreign banks for the past 5 years i.e. from

2003-2004 to 2007-2008.

2. To study the market performance of the various sector banks i.e. Public, Private &

Foreign Banks.

3. To analyze the impact of recent slowdown on the various sector Banks in India.

4. To study the recent developments in the Indian banking sector.

Need of the study:

The new millennium has brought along challenges and opportunities in the various fields

of economic activities including banking. The entry of various private sector and foreign

banks exposed the inefficiencies in the public sector banks. This paper focuses on the

achievement and performance of Public Sector Banks vis-à-vis Private Sector Banks and

Foreign Banks. The parameters selected for evaluation of performance of various

7

categories of banks are profitability and productivity. The time period for the

performance analysis has been chosen as 2003-04 to 2007-08.This paper compares

various categories of banks on their productivity and profitability and also measures the

impact of the recent slowdown on the Indian banking sector.

Methodology used:

A five years period (2003-2004 to 2007-2008) has been selected for evaluating the

performance. The logic of selection of this period is to find out the impact of

government’s decontrolled and liberalized policies on public sector banks as compared to

other categories of banks like private sector banks and foreign banks.

The other reason is that the new private sector banks, which are having major share in

asset holding, started their business commercially from the year 1996 onwards; to

segregate the overall result of the new private sector banks it is more appropriate to select

this period. The study uses Ratio analysis to compare profitability and business per

employees and profit per employees to compare the productivity of different categories of

banks. Ratio analysis is a powerful tool of financial analysis. In financial analysis ratios

are generally used as benchmarks for evaluating a firm’s position or performance. The

absolute values may not provide us meaningful values until and unless they are related to

some other relevant information. Ratios represent the relationship between two or more

variables. Ratios help to summarize large data to draw qualitative judgments about the

firm’s performance.

Ratio used for the measuring the profitability:

Net Profit Ratios: Net Profit/Total Income*100

Return On Net Worth: Net Profit/Net Worth*100

Capital adequacy ratio: Capital/Risk*100

Net profit, total income.

Formula used for measuring the productivity:

8

Business Per Employees: Business/Number Of Employees

Profit Per Employees: Profit/ Number Of Employees

Scope of the study:

The scope of the study is limited to the Indian Banking Sector only. For the purpose of

this study only those banks which are operating in India are taken into consideration.

Study period is limited between the time frame of 2004-2008.

Limitation of the study:

Time constraint is one of the limiting factors to conduct this study properly.

Non availability of the data on productivity of the banks as well as the capital

adequacy ratio data for the period 2004 and 2005.

Finding of the study is made on the basis of the analysis of the banks taken for the

study and it can vary from person to person.

The samples of the banks are taken on the convenience basis so as to meet the

objectives of the study.

9

10

Chapter-11.1: Introduction to the subject

ProductivityAspects of productivityProfitability How banks uses the profitability analysis1.2: Objective, Need, Scope & Methodology

1.1:Introduction to the subject:

1.1.1:Productivity

Definition

The amount of output per unit of input (labor, equipment, and capital). There are many

different ways of measuring productivity. For example, in a factory productivity might be

measured based on the number of hours it takes to produce a good, while in the service

sector productivity might be measured based on the revenue generated by an employee

divided by his/her salary.

The formula of total productivity is normally written as follows:

Total productivity = Output quantity / Input quantity

According to this formula, changes in input and output have to be measured inclusive of

both quantitative and qualitative changes. In practice, quantitative and qualitative changes

take place when relative quantities and relative prices of different input and output factors

alter. In order to accentuate qualitative changes in output and input, the formula of total

productivity shall be written as follows:

Total productivity = Output quality and quantity / Input quality and quantity

1.1.2: Aspects of productivity:

Productivity studies

Productivity studies analyze technical processes and engineering relationships such as

how much of an output can be produced in a specified period of time. It is related to the

11

concept of efficiency. While productivity is the amount of output produced relative to the

amount of resources (time and money) that go into the production, efficiency is the value

of output relative to the cost of inputs used. Productivity improves when the quantity of

output increases relative to the quantity of input. Efficiency improves, when the cost of

inputs used is reduced relative the value of output. A change in the price of inputs might

lead a firm to change the mix of inputs used, in order to reduce the cost of inputs used,

and improve efficiency, without actually increasing the quantity of output relative the

quantity of inputs. A change in technology, however, might allow a firm to increase

output with a given quantity of inputs; such an increase in productivity would be more

technically efficient, but might not reflect any change in allocative efficiency.

Increases in productivity

Companies can increase productivity in a variety of ways. The most obvious methods

involve automation and computerization which minimize the tasks that must be

performed by employees. Recently, less obvious techniques are being employed that

involve ergonomic design and worker comfort. A comfortable employee, the theory

maintains, can produce more than a counterpart who struggles through the day. In fact,

some studies claim that measures such as raising workplace temperature can have a

drastic effect on office productivity. Experiments done by the Japanese Shiseido

corporation also suggested that productivity could be increased by means of perfuming or

deodorizing the air conditioning system of workplaces. Increases in productivity also can

influence society more broadly, by improving living standards, and creating income.

They are central to the process generating economic growth and capital accumulation. A

new theory suggests that the increased contribution that productivity has on economic

growth is largely due to the relatively high price of technology and its exportation via

trade, as well as domestic use due to high demand, rather than attributing it to micro

economic efficiency theories which tend to downsize economic growth and reduce labor

productivity for the most part. Many economists see the economic expansion of the later

1990s in the United States as being allowed by the massive increase in worker

productivity that occurred during that period. The growth in aggregate supply allowed

increases in aggregate demand and decreases in unemployment at the same time that

12

inflation remained stable. Others emphasize drastic changes in patterns of social behavior

resulting from new communication technologies and changed male-female relationships.

Labor productivity

Labour productivity is generally speaking held to be the same as the "average product of

labor" (average output per worker or per worker-hour, an output which could be

measured in physical terms or in price terms). It is not the same as the marginal product

of labor, which refers to the increase in output that results from a corresponding increase

in labor input. The qualitative aspects of labor productivity such as creativity, innovation,

teamwork, improved quality of work and the effects on other areas in a company are

more difficult to measure.

Productivity paradox

Despite the proliferation of computers, there have not been any observable increases in

productivity as a result. One hypothesis to explain this is that computers are productive,

yet their productive gains are realized only after a lag period, during which

complementary capital investments must be developed to allow for the use of computers

to their full potential. Another hypothesis states that computers are simply not very

productivity enhancing because they require time, a scarce complementary human input.

This theory holds that although computers perform a variety of tasks, these tasks are not

done in any particularly new or efficient manner, but rather they are only done faster. It

has also been argued that computer automation just facilitates ever more complex

bureaucracies and regulation, and therefore produces a net reduction in real productivity.

Another explanation is that knowledge work productivity and IT productivity are linked,

and that without improving knowledge work productivity, IT productivity does not have

a governing mechanism

13

1.1.3: Profitability:

Ability of a firm to generate net income on a consistent basis. It is often measured by

price to earnings ratio.

1.1.4: How banks uses the profitability analysis:

Banks have come a long way towards Customer Relationship Management in the past

five years. In the 1980’s most banks had not yet created a consolidated Marketing

Customer Information File (MCIF). Their credit card accounts were kept on one

computer, checking accounts on another, and home mortgages on a third. By 1990, most

banks had figured out how to group all customer accounts together on an MCIF, even if

they were maintained separately.

The next step was determining the profitability of each customer. This is not easy.

Modern profitability software adds up the revenues from each account, and subtracts the

bank’s costs on a monthly basis. The costs include the cost of the funds, provision for

losses, overhead, deposit insurance, and customer’s usage of bank services. Profitability

software is still in its infancy. It offers a real challenge for software providers to deliver

an outstanding product. It will be particularly useful for advanced data applications.

Once the software has determined the profitability of each account each month, each

customer’s total profitability has to be computed by adding together the profits or losses

from each of his accounts. When banks first do this calculation, it often comes as quite a

shock. Some, like the Fleet Bank, have found that as many as half of their total customers

are unprofitable. Many will never be profitable. Their marketing staffs are busy working

to acquire and retain people who destroy value for the bank!

14

With knowledge of profitability, banks begin to classify their customers into profitability

segments so that they can understand and modify customer and employee behavior. Here

is the way one bank classified its customers in a recent month:

(Chart 1.1)

The top two segments, representing 16% of the bank’s customers, were responsible for

105% of the bank’s total profit. The bottom 28% represented a loss of 22% of the profit.

This picture is typical of many banks.

What are banks doing about this situation? In the first place, few banks have reached the

this stage yet, and most of those have not developed any conscious strategies to deal with

the problem. Those that have developed a plan, however, have come up with some

innovative ideas.

Most are working very hard to retain the customers in the top two groups. These are

designated as Gold customers. Banks try to extend special services to them. Gold

customers call in on special toll free lines. Branch managers are furnished with the names

of their top customers, and are instructed to meet and greet them when they visit a

branch. They are assigned personal bankers, who call and introduce themselves.

15

The customer access screens used by bank personnel include a profitability code, so

employees can know whether they are dealing with a 5, 4, 3, 2, or 1. When the loans for

the 1s come up for renewal, they are renewed at a higher rate, to try to nudge them into

profitability, or possibly to get them to take their business elsewhere. The software does

something else which is quite sophisticated. The software determines which bank

products should be suggested to the customer during customer contacts on the phone or in

person. These products are selected by formulas that determine what bank products the

customer currently uses, and what his current balances would indicate that he might be

eligible for and want to use next. The software also suggests the appropriate rates for

loans or CDs based both on the current market, and the customer’s profitability level. The

bank software is often tied to the customer service call director, which routes Gold

customer calls to special Gold Service teams, and provides only minimal service for

unprofitable customers.

Customers who visit branch offices cost the bank considerable money. It is much more

economical for customers to use an ATM, mail, or PC banking. For this reason, some

banks have tried to discourage branch visits by charging a fee. Profitability analysis

shows that such policies may be a serious mistake. As the above chart indicates, branches

are visited most by two groups: the most profitable and the least profitable. Policies that

turn away unprofitable customers may also turn off Gold customers.

Beyond Profitability

Profitability only measures the past. Lifetime value projects this into the future, and looks

at what each customer can do for the bank in the coming years. Fleet Bank, for example,

determines customer profitability and lifetime value each month, and also computes

potential lifetime value if the customer can be talked into purchasing the most likely next

products. In this way, Fleet manages its customer relationships in a highly professional

manner. We will be covering lifetime value in a future article.

What are marketer’s roles in this revolution in banking customer management? Database

marketing analysts should:

Have profitability computation software available

16

Assist banks in creating marketing customer profitability customer segments

 Help to create “Next best product” software

Have the results of this program appear on customer contact screens throughout the bank

Assist banks in moving their customers towards profitability, using these new techniques.

17

1.2.1: Need of the study:

The new millennium has brought along challenges and opportunities in the various fields

of economic activities including banking. The entry of various private sector and foreign

banks exposed the inefficiencies in the public sector banks. This paper focuses on the

achievement and performance of Public Sector Banks vis-à-vis Private Sector Banks and

Foreign Banks. The parameters selected for evaluation of performance of various

categories of banks are profitability and productivity. The time period for the

performance analysis has been chosen as 2003-04 to 2007-08.This paper compares

various categories of banks on their productivity and profitability and also measures the

impact of the recent slowdown on the Indian banking sector.

1.2.2: Objectives of the study

5. To compare the profitability and productivity of the public sector banks vis-à-vis

with the private sector banks and foreign banks for the past 5 years i.e. from

2003-2004 to 2007-2008.

6. To study the market performance of the various sector banks i.e. Public, Private &

Foreign Banks.

7. To analyze the impact of recent slowdown on the various sector Banks in India.

8. To study the recent developments in the Indian banking sector.

1.2.3: Scope of the study:

The scope of the study is limited to the Indian Banking Sector only. For the purpose of

this study only those banks which are operating in India are taken into consideration.

Study period is limited between the time frame of 2004-2008.

18

1.2.4: Research Methodology:

Research methodology is a way to systematically solve the research problem. The

research methodology includes the various methods and techniques for conducting a

research. “Marketing Research is the systematic design, collection analysis and reporting

of data and finding relevant solution to a specific marketing situation or problem.” D.

Slesinger and M. Stephenson in the encyclopedia of social sciences define Research as

“the manipulation of things, concept or symbols for the purpose of generalizing to

extend, correct or verify knowledge, whether that knowledge aid n construction of theory

and practice of an art.

Research is thus an original contribution to the existing stock of knowledge making for

its advancement. The purpose of research is to discover the answers to the questions

through the application of scientific procedures.

1.2.4.1 Defining the Research Problem and Objectives: It is said, “A problem well

defined is half solved”. The first step in research methodology is to define the problem

and deciding the research objective. The objective of this study is to know about the

“Investors Perception towards Credit Rating”

1.2.4.2 Research Design: Research Design is a blueprint or framework for conducting

the research project. It specifies the details of the procedures necessary for obtaining the

information needed to structure and solve marketing research problem. The research

design of the study is diagnostic research.

19

1.2.4.3 Sampling design: sampling can be defined as the section of some part of an

aggregate or totality on the basis of which judgment or an inference about aggregate or

totality is made. The steps involved in sampling design are as follows:

1.2.4.3(1) Universe: Universe refers to the total of the units in field of inquiry. This study

is restricted to Indian Banking Sector only.

1.2.4.3(2) Sampling unit: Sampling frame is the representation of the elements of the

target population. Sampling unit of this study is the Public, Private and foreign sector

banks in India.

1.2.4.3(3) Sampling size: sampling size is the total no. of units which we covered in the

study.

The sample used for the study is as follows:

1. 10 public sector banks,

2. 08 Private sector banks consisting of old private sector and new private sector banks.

3. 10 Foreign Banks in India.

PUBLIC SECTOR BANKS

FOREIGN BANKS PRIVATE BANKS

Andhra BankABN Amro Bank N.V. ICICI BANK

Bank of Baroda Bank of America NA AXIS BANK

Canara Bank Barclays Bank PLC YES BANK

Indian Overseas Bank Citibank N.A. LAKSHMI VILAS BANK

Oriental Bank of Commerce HSBC KARUR VYSYA BANK

Punjab National Bank Deutsche Bank AGDEVELOPMENT CREDIT BANK

State Bank of India JPMorgan Chase KOTAK MAHINDRA BANK

20

Bank

UCO Bank Societe Generale CITY UNION BANK

United Bank of India BNP Paribas

Vijaya BankThe Bank of Nova Scotia

(Table 1.4)

1.2.4.3(4) Sampling Techniques: Sampling Technique used in this study is Convenient

Sampling.

Convenient sampling: it is that type of sampling where the researcher selects the sample

according to his or her convenience.

1.2.4.4 Data Collection and Analysis: Data can be collected in two ways

1.2.4.4 (a) Primary data: Primary data are those, which are collected a fresh and for the

first time and thus happen to be original in character. It is the backbone of any study.

1.2.4.4 (b) Secondary data: Secondary data are those which have already been collected

by someone else and which have already been passed through the statistical process. In

this case one is not confronted with the problems that are usually associated with the

collection of original data. Secondary data either is published data or unpublished data.

1.2.4.5 Source of data: The study is based on secondary data collected from the various

volumes of banking statistics published by Reserve Bank of India and Indian Banking

Association (IBA). The variables studied are interest paid; interest earned, total deposits

and advances, non operating income and expenses.

1.2.4.6 Data Analysis Tools: A five years period (2003-2004 to 2007-2008) has been

selected for evaluating the performance. The logic of selection of this period is to find out

the impact of government’s decontrolled and liberalized policies on public sector banks

as compared to other categories of banks like private sector banks and foreign banks.

21

The other reason is that the new private sector banks, which are having major share in

asset holding, started their business commercially from the year 1996 onwards; to

segregate the overall result of the new private sector banks it is more appropriate to select

this period. The study uses Ratio analysis to compare profitability and business per

employees and profit per employees to compare the productivity of different categories of

banks. Ratio analysis is a powerful tool of financial analysis. In financial analysis ratios

are generally used as benchmarks for evaluating a firm’s position or performance. The

absolute values may not provide us meaningful values until and unless they are related to

some other relevant information. Ratios represent the relationship between two or more

variables. Ratios help to summarize large data to draw qualitative judgments about the

firm’s performance.

Ratio used for the measuring the profitability:

Net Profit Ratios: Net Profit/Total Income*100

Return On Net Worth: Net Profit/Net Worth*100

Capital adequacy ratio: Capital/Risk*100

net profit, total income.

Formula used for measuring the productivity:

Business per Employees: Business/Number of Employees

Profit Per Employees: Profit/ Number Of Employees

22

23

Chapter-2Introduction to Indian Banking

History Banking system in IndiaBanks in India The status of the banks in India as on December 2008

2.1: Introduction:

The new millennium has brought along challenges and opportunities in the various fields

of economic activities including banking. The entry of various private sector and foreign

banks exposed the inefficiencies in the public sector banks. . Indian banking, which was

operating in a highly comfortable environment till the beginning of the 1990s, has been

pushed into the choppy water of intense competition. The modern banking activity is

marked by itineraries into un-chartered horizons mingled with risks and heavy

competition. Immediately after nationalization, the Public Sector Banks spread their

branches to remote areas at a rapid pace Their main objective was to act on behalf of the

government to fulfill economic obligations towards the common man. They acted over

enthusiastically in penetrating into far-flung and remote corners of the country. The

social responsibility that was entrusted upon the Public sector Banks digresses them from

the profit motive. On the other hand private and foreign banks did not make such moves.

Instead, they pursued profit making as the objective for their operations.

In 1992 the RBI launched banking sector reforms, as per the recommendations made by

the Narasimhan Committee on financial reforms to create a more profitable, efficient and

sound banking system. The reforms opened the banking sector for private players.

Domestic private sector banks are divided into two categories old banks which existed

with the public sector banks before the entry deregulation and the new banks that came

into existence after the reforms of 1992. The old banks are smaller in size and are

regional. In contrast the new private sector banks are much larger in size, operate

primarily in metros and are technologically superior. Interestingly, unlike many

developing countries, where the government owned financial institutions own major

24

equity of the private banks, the equity share holders of the old private sector banks were

mainly non government bodies. However, most of the new private sector banks, in India

are promoted by the government owned financial Institutions. These banks, too, are in the

process of reducing promoter’s stake by raising funds through the capital market

represents the banking system in India.

The emergence of New Private Sector Banks in 1995 exposed the inefficiencies of the

public sector banks. New Private Sector Banks have set a blistering pace of growth,

easily beating the growth rate of Public Sector Banks. The business share for Private

Sector Banks is very small but their share in the total net profit of the banking system is

disproportionately high. Just like in any other business, profit in banking acts as a

stimulant factor for management to expand and improve their services. Though Profit

maximization is secondary for Public Sector Banks, adequate profit is necessary for their

survival and healthy operations because even socio-economic obligations, like branch

expansion in rural areas and priority sector advances cannot be fulfilled without adequate

profit.

2.2: History of Banking in India

Without a sound and effective banking system in India it cannot have a healthy economy.

The banking system of India should not only be hassle free but it should be able to meet

new challenges posed by the technology and any other external and internal factors.

For the past three decades India's banking system has several outstanding achievements

to its credit. The most striking is its extensive reach. It is no longer confined to only

metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even

to the remote corners of the country. This is one of the main reasons of India's growth

process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with

the nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a

25

draft or for withdrawing his own money. Today, he has a choice. Gone are days when the

most efficient bank transferred money from one branch to other in two days. Now it is

simple as instant messaging or dial a pizza. Money have become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till

today, the journey of Indian Banking System can be segregated into three distinct phases.

They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

New phase of Indian Banking System with the advent of Indian Financial &

Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and

Phase III.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan

and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of

Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency

Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was

established which started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab

National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and

1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank,

and Bank of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic

26

failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To

streamline the functioning and activities of commercial banks, the Government of India

came up with The Banking Companies Act, 1949 which was later changed to Banking

Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of

India was vested with extensive powers for the supervision of banking in India as the

Central Banking Authority.

During those day’s public has lesser confidence in the banks. As an aftermath deposit

mobilization was slow. Abreast of it the savings bank facility provided by the Postal

department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence.

In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a

large scale specially in rural and semi-urban areas. It formed State Bank of India to act as

the principal agent of RBI and to handle banking transactions of the Union and State

Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th

July, 1969, major process of nationalization was carried out. It was the effort of the then

Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country

were nationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980

with seven more banks. This step brought 80% of the banking segment in India under

Government ownership.

The following are the steps taken by the Government of India to Regulate Banking

Institutions in the Country:

1949: Enactment of Banking Regulation Act.

27

1955: Nationalisation of State Bank of India.

1959: Nationalisation of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalisation of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and

immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its

reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was

set up by his name which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put

to give a satisfactory service to customers. Phone banking and net banking is introduced.

The entire system became more convenient and swift. Time is given more importance

than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any

crisis triggered by any external macroeconomics shock as other East Asian Countries

suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high,

28

the capital account is not yet fully convertible, and banks and their customers have

limited foreign exchange exposure.

2.3: The banking system in India

Almost 80% of the businesses are still controlled by Public Sector Banks (PSBs). PSBs

are still dominating the commercial banking system. Shares of the leading PSBs are

already listed on the stock exchanges.

The RBI has given licenses to new private sector banks as part of the liberalisation

process. The RBI has also been granting licensees to industrial houses. Many banks are

successfully running in the retail and consumer segments but are yet to deliver services to

industrial finance, retail trade, small business and agricultural finance.

The PSBs will play an important role in the industry due to its number of branches and

foreign banks facing the constraint of limited number of branches. Hence, in order to

achieve an efficient banking system, the onus is on the Government to encourage the

PSBs to be run on professional lines.

Banks in India

In India the banks are being segregated in different groups. Each group has their own

benefits and limitations in operating in India. Each has their own dedicated target market.

Few of them only work in rural sector while others in both rural as well as urban. Many

even are only catering in cities. Some are of Indian origin and some are foreign players.

All these details and many more is discussed over here. The banks and its relation with

the customers, their mode of operation, the names of banks under different groups and

other such useful information's are talked about.

29

One more section has been taken note of is the upcoming foreign banks in India. The RBI

has shown certain interest to involve more of foreign banks than the existing one

recently. This step has paved a way for few more foreign banks to start business in India.

Major Banks in India

ABN-AMRO Bank

Abu Dhabi

Commercial Bank

American Express

Bank

Andhra Bank

Allahabad Bank

Axis Bank (Earlier

UTI Bank)

Bank of Baroda

Bank of India

Bank of Maharastra

Bank of Punjab

Bank of Rajasthan

Bank of Ceylon

BNP Paribas Bank

Indian Bank

Indian Overseas Bank

IndusInd Bank

ING Vysya Bank

Jammu & Kashmir

Bank

JPMorgan Chase Bank

Karnataka Bank

Karur Vysya Bank

Laxmi Vilas Bank

Oriental Bank of

Commerce

Punjab National Bank

Punjab & Sind Bank

Scotia Bank

South Indian Bank

Standard Chartered

30

Canara Bank

Catholic Syrian Bank

Central Bank of India

Centurion Bank

China Trust

Commercial Bank

Citi Bank

City Union Bank

Corporation Bank

Dena Bank

Deutsche Bank

Development Credit

Bank

Dhanalakshmi Bank

Federal Bank

HDFC Bank

HSBC

ICICI Bank

IDBI Bank

Bank

State Bank of India

(SBI)

State Bank of Bikaner

& Jaipur

State Bank of

Hyderabad

State Bank of Indore

State Bank of Mysore

State Bank of

Saurastra

State Bank of

Travancore

Syndicate Bank

Taib Bank

UCO Bank

Union Bank of India

United Bank of India

United Western Bank

Vijaya Bank

(Table 1.i)

31

Banking in India

Central bank Reserve Bank of India

Nationalized banks

Allahabad Bank · Andhra Bank · Bank of Baroda · Bank of

India · Bank of Maharashtra · Canara Bank · Central Bank of

India · Corporation Bank · Dena Bank · Indian Bank · Indian

Overseas Bank · Oriental Bank of Commerce · Punjab & Sind

Bank · Punjab National Bank · Syndicate Bank · Union Bank

of India · United Bank of India · UCO Bank · Vijaya Bank ·

IDBI Bank

State Bank Group

State Bank of India · State Bank of Bikaner & Jaipur · State

Bank of Hyderabad · State Bank of Indore · State Bank of

Mysore · State Bank of Patiala · State Bank of Saurashtra ·

State Bank of Travancore

32

Private banks

Axis Bank · Bank of Rajasthan · Bharat Overseas Bank ·

Catholic Syrian Bank · Centurion Bank of Punjab · City

Union Bank · Development Credit Bank · Dhanalakshmi

Bank · Federal Bank · Ganesh Bank of Kurundwad · HDFC

Bank · ICICI Bank · IndusInd Bank · ING Vysya Bank ·

Jammu & Kashmir Bank · Karnataka Bank Limited · Karur

Vysya Bank · Kotak Mahindra Bank · Lakshmi Vilas Bank ·

Nainital Bank · Ratnakar Bank · SBI Commercial and

International Bank · South Indian Bank · Tamil Nadu

Mercantile Bank · Amazing Mercantile Bank · YES Bank

Foreign banks

ABN AMRO  · Barclays Bank · Citibank India · HSBC ·

Standard Chartered · Deutsche Bank  · Royal Bank of

Scotland

Regional Rural

banks

South Malabar Gramin Bank · North Malabar Gramin Bank ·

Pragathi Gramin Bank · Shreyas Gramin Bank

Financial Services

Real Time Gross Settlement(RTGS)  · National Electronic

Fund Transfer (NEFT) · Structured Financial Messaging

System (SFMS) · CashTree · Cashnet · Automated Teller

Machine (ATM)

(Table 1.2)

33

ss

34

(Chart 1.2)

Fact Files of Banks in India

The first, the oldest, the largest, the biggest, get all such types of information's about

Banking in India in this section.

The first bank in India to be given an ISO Certification Canara Bank

The first bank in Northern India to get ISO 9002 certification for

their selected branches

Punjab and Sind

Bank

The first Indian bank to have been started solely with Indian capitalPunjab National

Bank

The first among the private sector banks in Kerala to become a

scheduled bank in 1946 under the RBI ActSouth Indian Bank

India's oldest, largest and most successful commercial bank,

offering the widest possible range of domestic, international and

NRI products and services, through its vast network in India and

State Bank of India

35

overseas

India's second largest private sector bank and is now the largest

scheduled commercial bank in India

The Federal Bank

Limited

Bank which started as private shareholders banks, mostly Europeans

shareholders

Imperial Bank of

India

The first Indian bank to open a branch outside India in London in

1946 and the first to open a branch in continental Europe at Paris in

1974

Bank of India,

founded in 1906 in

Mumbai

The oldest Public Sector Bank in India having branches all over

India and serving the customers for the last 132 yearsAllahabad Bank

The first Indian commercial bank which was wholly owned and

managed by Indians

Central Bank of

India

(Table 1.3)

Bank of India was founded in 1906 in Mumbai. It became the first Indian bank to open a

branch outside India in London in 1946 and the first to open a branch in continental

Europe at Paris in 1974.

2.4: Status of the Indian Banking Sector as On December 2008:

ASSETS: Rs.42, 76,328cr (in 2008)

36

Public Sector Bank, 70.17%

Private Sector Bank, 21.29%

Foreign Banks, 8.53%

Public Sector Bank

Private Sector Bank

Foreign Banks

(Chart 1.3)

ADVANCES: Rs.24, 47,944 cr (in 2008)

Public Sector Bank, 72.93%

Private Sector Bank, 20.46%

Foreign Banks, 6.61%

Public Sector Bank

Private Sector Bank

Foreign Banks

(Chart 1.4)

NET PROFITS: Rs 42,506 cr (in 2008)

37

Public Sector Bank, 62.44%

Private Sector Bank, 22.03%

Foreign Banks, 15.53%

Public Sector Bank

Private Sector Bank

Foreign Banks

(Chart 1.5)

38

Chapter-3

Literature Review

Literature Review

Perhaps because profitability was not the objective of Indian banks, there have not been

many attempts to compare the profitability amongst the various categories of banks.

Verma and Verma attempted to determine the determinants of profitability of SBI

group, other nationalized and foreign banks in India.

The study by Parsons, Gotlieb, and Denny (1993), is one of the studies that deal with

the impact of IT in banking productivity per se. They conclude from their estimation of

data from five Canadian banks using transom production function that, while there is a

17-23 percent increase in productivity with the use of computers, the returns are very

modest compared to the levels of IT investments.

The other study to examine the effect of IT investment on both productivity and

profitability in the US retail banking sector is conducted by Prasad and Harker (1997).

They conclude that additional investment in IT capital may have no real benefits and may

be more of strategic necessity to stay within the competition. However, the results

indicate that there are substantially high returns to increase in investment in IT labor.

39

A study by Das(1998), compares performance of Public Sector Banks for 3 years in the

post reform period, 1992, 95, 98. He notes that while there is a welcome increase in

emphasis on non-interest income, Banks have tended to show risk averse behavior by

opting for relatively risk free investments over risky loans.

Shanmugam and Das(1999) reported that, in general, State bank group and private-

foreign group banks have performed better than their counterparts during 1992-1999.

Sarkar & Das (1999), compared performance of Public Sector Banks, Private Banks,

and Foreign Banks for the year- 1994-95 on their profitability, productivity & financial

management. They found that Public Sector Banks compare poorly with the other two

categories of banks.

Another study by Ram Mohan (2000) covers a recent period, 1996-97 to 1999-2000. He

found that over these years the profitability of the Public sector Banks did improve in

comparison to the Private and Foreign Banks, but they have lagged behind in their ability

to attract deposits at favorable interest rates and have been slow in technology up

gradation and improving staffing and employment practices, which may have negative

implications on their longer–term profitability.

Researchers have earlier opined that the major reason for declining bank profitability are

increasing pre-emption for CRR, SLR, rigorously structured interest rate, the burden of

social banking and enormous increase in the establishment cost. Recently, there has been

an increased amount of stress on soundness of the Balance Sheet as well as on the

profitability. It is recognized that Public Sector Banks must have a strong balance sheet

and should be profitable. It also implies that bank interest and other earnings should be

sufficient to cover its financial & administrative expenses. Stronger balance sheet also

means that the banks have sufficient surplus for provisions of bad debts, tax liabilities &

depreciation of financial assets, to pay dividends and to augment reserves. A bank’s

strong balance sheet also implies that it has sufficient capital & reserve to protect its

depositors and other creditors from the risks it bears on its assets. The major reasons

identified for the declining levels of profitability of Public Sector Banks are

mismanagement, liquidity, credit polices, increased lending to priority & preferred sector,

40

mounting agricultural over dues & incidences of sickness of industrial units, rise in

operation cost, lack of efforts in manpower planning according to Bist, Mishra &

Balwal (2000).

Ganeshan (2001), reveals by an empirical establishment of profit function that interest

cost, interest income, deposits per branch, credit to total assets, proportion of priority

sector advances & interest income loss are significant determinants of the profits &

profitability of Indian public sector banks. Sarkar found that the foreign banks were

more profitable and efficient than Indian banks and amongst the Indian Banks private

banks were superior to the public sector banks. They also conclude that the non-traded

private sector banks are not significantly different from the public sector banks with

respect to profitability and efficiency, a result consistent with the property right

hypothesis.

Kaveri (2001) considered nine efficiency parameters; capital adequacy ratio, Net NPA as

percentage of Net advances, Net profit to total assets, Gross profit to working funds, net

interest income to total assets, interest expended to total assets, intermediation cost to

total assets and provisions and contingencies to total assets. It concludes no bank can be

weak or potential weak all of a sudden. There is a gradual deterioration in the position of

default and profitability.

Sathye (2002) studied the impact of privatization on banks performance and efficiency

for the period 1998-2002 and found that partially privatized banks have performed better

than fully public sector banks and they are catching up with the banks in the private

sector.

Another important study undertaken by offsite monitoring and surveillance division of

department of Banking Supervision (2002) used financial indicators to derive indirect

linkages by assuming computerization as one of the factor in the improvement in

efficiency. They concluded that higher performance levels have been achieved without

corresponding increase in the number of employees. Also, it has been possible for Public

Sector Banks and Old Private Banks to improve their productivity and efficiency over a

period of five years.

41

Sayuri, Shrai (2002) assessed the impact of reforms by examining the changes in

performance of banking sector. It found that the performance of public sector banks

improved in the second half of the 1990’s.

B. Janki (2002) analyzed the effect of technology on labour productivity; he concluded

efficiency can be enhanced by using technology to develop new products and motivation

of work force. To conclude efficiency is a function of input efficiency and output

efficiency. Both input and output efficiency are function of many factors that are

locatives and technical in nature.

The other study conducted by Launardi, Becker and Macada (2003), found

competition, products and services, and customers, the main strategic variables affecting

the IT and there is no difference of opinion between IT executives and other functional

executives, regarding their perception of the impact of IT on strategic variables.

According to the Business Standard banking annual Survey 2003, Indian Banks

showed a 52.3% growth in the net profit in the year 2002-2003. Public sector banks

outperformed the other category of banks bagging six of the top 10 slots. Only one

foreign Bank could make it to the top. The remaining three slots were occupied by the

private banks.

Choudhari and Tripathy (2004) applied DEA to measure the relative performance of

public sector banks and conclude that the Corporation Bank is the efficient in all

indicators i.e. profitability, financial management, growth, productivity, and liquidity,

while Oriental Bank of Commerce is next mostefficient

Sharad Kumar and M. Sreeramulu, 2007 the study compares the employee

productivity and employee cost ratios between the traditional banks and modern banks

from 1997 to 2008. The study concludes that the performance of the modern banks

(foreign and new private sector banks) was much superior to the traditional banks (public

sector and old private sector banks). However, the gap between the performance of

modern and traditional banks on all the five variables has shown a decreasing trend,

42

which has significantly reduced during the period of 12 years under study, on account of

the measures taken by the traditional banks during the period.

R.K. Mittal and Sanjay Dhin 2007 studies show the impact of computerization on

productivity and profitability of Indian banks. This study founds that IT initiative were

found to be more efficient in productivity and profitability parameters than public sector

banks.

Deepak Tandon 2008, research on Performance variances & efficiency parameters of the

Indian Public Sector Banks shows that the public sector banks (PSBs) continue to be a

dominant part of the banking system. As on March 31, 2008, the PSBs accounted for 69.9

per cent of the aggregate assets and 72.7 per cent of the aggregate advances of the

Scheduled commercial banking system. This paper empirically defines and an attempt

has been made by the authors to analyze technical efficiency of Public Sector Banks

operating in India.

43

Chapter-4Analysis of the profitability and productivity of Public sector banks vis-à-vis with Private sector banks and Foreign banks

Data Analysis & Interpretation:

OBJECTIVE 1: To compare the profitability and productivity of the public

sector banks vis-à-vis with the private sector banks and foreign banks for the past 5

years i.e. from 2003-2004 to 2007-2008.

Productivity of Indian banks:

PUBLIC SECTOR BANKS Business per employee (Rs. In Lakhs)

Profit per employee (Rs. In Lakhs)

  2005-06 2006-07 2007-08 2005-062006-07

2007-08

Andhra Bank 427 536 627 3.69 4.14 4.30

Bank of Baroda 396 555 710 2.13 2.73 3.94

Canara Bank 442 549 609 3.02 3.24 3.65

Indian Overseas Bank 355 467 583 3.22 4.04 4.82

44

Oriental Bank of Commerce 570 743 924 5.37 5.61 5.84

Punjab National Bank 331 407 505 2.48 2.68 3.66

State Bank of India 299 357 456 2.17 2.37 3.73

UCO Bank 387 464 580 0.82 1.30 1.76

United Bank of India 254 350 463 1.18 1.59 1.99

Vijaya Bank 369 455 613 1.16 3.04 3.32

(Table 2.1)

Interpretation:

By analyzing the data of the public sector banks for the past 3 years i.e. from 2006 to

2008 on the productivity of public sector banks, I found that during this period the public

sector bank shows a gradual increase in their business per employees as well as the profit

per employees. During the year 2008 the public sector bank are rated as the best banking

sector in India.

FOREIGN BANKSBusiness per employee

(Rs. in Lakhs)

Profit per employee

(Rs. in Lakhs)

  2005-06 2006-07 2007-08 2005-06

2006-

07

2007-

08

ABN Amro Bank N.V. 905.82 1,011.88 1,070.26 8.15 11.36 7.66

Bank of America NA 1,924.81 1,920.89 2,483.54 51.82 69.09 102.08

Barclays Bank PLC 148.51 280.54 942.33 271.00 36.28 0.50

Citibank N.A. 1,607.92 1,360.48 1,763.78 21.71 17.33 37.73

HSBC 975.65 979.68 1,012.34 12.07 14.32 16.69

Deutsche Bank AG 1,016.83 1,143.53 1,616.74 18.57 20.98 27.54

45

JPMorgan Chase Bank 1,252.09 1,121.88 1,438.95 88.94 82.15 153.77

Societe Generale 1,467.20 1,316.00 1,459.10 20.80 19.20 33.90

BNP Paribas 1,206.05 1,353.00 1,950.00 6.29 19.00 36.00

The Bank of Nova Scotia 2,040.25 2,311.12 3,082.88 16.50 39.10 49.89

(Table 2.2)

Interpretation:

By analyzing the data of the foreign banks for the past 3 years i.e. from 2006 to 2008 on

the productivity of public sector banks, I found that during this period most of the foreign

banks which are taken for the study shows an increasing trend except ABN Amro Bank

and Barclays Bank for the year ending 2008 in case of profit per employees.

In case of the business per employees all the foreign banks shows that business per

employees is increasing y-o-y basis.

PRIVATE BANKSBusiness per employee

(Rs. in Lakhs)

Profit per employee

(Rs. in Lakhs)

 

2005-

06

2006-

07

2007-

08

2005-

06

2006-

07

2007-

08

ICICI BANK 1017 1027 1008 8.7 9 10

AXIS BANK 1020 1024 1174 8.69 7.59 8.39

YES BANK 373.69 400.54 518.85 2.78 2.83 2.93

LAKSHMI VILAS BANK 371 430 462.07 2.69 2.88 3.05

KARUR VYSYA BANK 390 489 604 4.30 4.87 5.82

DEVELOPMENT CREDIT 432 451 542 3.92 4.76 5.31

46

BANK

KOTAK MAHINDRA BANK 634 648 755 6.43 7.79 13.82

CITY UNION BANK 413 497 587 3.97 4.46 5.98

(Table 2.3)

Interpretation:

By analyzing the data

of the private sector

banks for the past 3

years i.e. from 2006 to

2008 on the

productivity of public

sector banks, I found

that during this period

the private sector bank

shows a gradual

increase in their profit

per employees.

In case of the business per employees all banks excepts ICICI bank reported decrease in

the year 2008. The main reason for this was the world wide financial turmoil as well as

the rumors about the ICICI Bank in the market regarding their investment in the Lehman

Brothers.

ANALYSIS OF THE PROFITABILTY OF THE INDIAN BANKS:CAPITAL ADEQUACY RATIOS: (Figures in %age)

Private Sector bank

March2008 March2007 March2006

ICICI BANK 13.97 11.69 13.35

AXIS BANK 13.75 11.57 11.08

YES BANK 13.60 13.60 16.40

LAKSHMI VILAS BANK 12.73 12.43 10.79

KARUR VYSYA BANK 12.58 14.51 14.79

DEVELOPMENT CREDIT BANK 13.38 11.34 9.66

KOTAK MAHINDRA BANK

18.65 13.46 11.27

CITY UNION BANK 12.48 12.58 12.33

47

(Table 3.1)

Interpretation:

By analyzing the data of the private sector banks for the past 3 years i.e. from 2006 to

2008 on the capital adequacy ratios, I found that during this period most of the private

sector banks have maintained their CAR above 12 % mark.

As in the year 2008 RBI has prescribed that the Public sector banks have to maintain

minimum 12% CAR in order to cope with the world over financial turmoil and its impact

on the Indian economy.

Public Sector bank

March2008 March2007 March2006

Andhra Bank 11.61 11.33 14.00

Bank of Baroda 12.91 11.80 13.65

Canara Bank 13.25 13.50 11.22

Indian Overseas Bank 11.96 13.27 13.04

Oriental Bank of Commerce 12.12 12.51 11.04

Punjab National Bank 12.96 12.29 11.95

State Bank of India 12.64 12.34 11.88

UCO Bank 10.09 11.56 11.12

United Bank of India 11.88 12.02 13.12

Vijaya Bank 11.22 11.21 11.94

48

(Table 3.2)

Interpretation:

By analyzing the data of

the public sector banks

for the past 3 years i.e. from 2006 to 2008 on the capital adequacy ratios, I found that

during this period most of the public sector banks have maintained their CAR above 10

% mark. As in the year 2008 RBI has prescribed that the Public sector banks have to

maintain minimum 12% CAR in order to cope with the world over financial turmoil and

its impact on the Indian economy.

During the year 2008 RBI infuses the extra stimulus package to the public sector banks to

improve their CAR to 12% mark, so as the can meets the financial requirements of the

Indian economy during the recessionary period.

Foreign bankMarch2008 March2007 March2006

ABN Amro Bank N.V. 12.92 11.34 10.44

Bank of America NA 12.14 13.33 23.40

Barclays Bank PLC 21.11 13.68 22.92

Citibank N.A. 12.00 11.06 11.33

HSBC 10.59 11.06 10.61

Deutsche Bank AG 13.58 10.62 12.74

JP Morgan Chase Bank 17.72 16.14 11.76

Societe Generale 26.62 31.82 37.40

BNP Paribas 11.79 10.76 11.61

The Bank of Nova Scotia 20.15 23.26 13.17

49

(Table 3.3)

Interpretation:

By analyzing the data of the foreign banks for the past 3 years i.e. from 2006 to 2008 on

the capital adequacy ratios, I found that during this period most of the foreign banks have

maintained their CAR above 10 % mark. There are some of the foreign banks who has

maintained their CAR at very high level e.g. Societe Generale, the bank of Nova Scotia

etc.

In order to cope with the financial meltdown it is advisable to every banks to maintain at

least 10% to 12% CAR.

PUBLIC SECTOR BANKS

March2008 March2007 March2006 March2005 March2004

Andhra Bank 11.84 14.53 15.83 18.18 15.96

50

Bank of Baroda 10.38 10.22 10.76 9.77 12.13

Canara Bank 9.61 11.60 13.82 12.81 14.73

Indian Overseas Bank

13.94 16.18 16.44 14.27 11.40

Oriental Bank of Commerce 11.38 15.35 12.54 19.44 17.03

Punjab National Bank 12.68 12.53 14.50 13.84 11.45

State Bank of India 11.67 10.12 11.21 11.56 9.79

UCO Bank 5.75 5.68 4.29 8.97 11.69

United Bank of India 8.07 8.81 7.96 4.90 0.91

Vijaya Bank 8.65 11.12 5.23 17.87 16.75

NET PROFIT RATIOS: (Figures in %age)

(Table 4.1)

Interpretation:

By analyzing the data of the public sector banks for the past 5 years i.e. from 2004 to

2008 on the net profit ratios (NPR), I found that during this period net profit ratios of the

most of the public sector banks decrease in the year 2007-2008.

The main reason for this decrease in the NPR is the financial turmoil in world over

economy as well as the slowdown in the Indian economy.

Private Banks March2008 March2007 March2006 March2005 March2004

ICICI BANK 10.51 10.81 14.12 16.32 13.67

AXIS BANK 12.22 12.01 13.47 14.33 13.14

51

YES BANK 12.01 12.06 19.08 -7.80

LAKSHMI VILAS BANK 4.37 3.76 6.02 1.21 11.03

KARUR VYSYA BANK 16.12 16.47 17.67 16.28 22.12

DEVELOPMENT CREDIT BANK 5.29 1.75 -23.95 -46.62 3.93

KOTAK MAHINDRA BANK

10.37 8.84 12.97 15.35 20.57

CITY UNION BANK 14.96 15.98 15.25 14.42 16.76

(Table 4.2)

Interpretation:

By analyzing the data of the public sector banks for the past 5 years i.e. from 2004 to

2008 on the net profit ratios (NPR), I found that during this period net profit ratios of the

most of the newly established private sector banks shows an increase in NPR, while the

major private sector banks reports slight decrease in their NPR in the year 2007-2008. As

per the study Kotak Mahindra Bank reported the highest NPR during 2008.

The main reason for this decrease in the NPR is the financial turmoil in world over

economy as well as the slowdown in the Indian economy.

Foreign bankMarch2008 March2007 March2006 March 05 March 04

ABN Amro Bank N.V. 7.62253165 12.6471978 11.1584246 6.386141 8.228854

52

Bank of America NA 35.4226627 29.4985518 35.1931551 39.99008 43.31145

Barclays Bank PLC 0.51622543 25.6715997 15.6866841 14.05015 8.133511

Citibank N.A. 21.4534649 15.7082318 21.4503972 20.35234 17.7084

HSBC 16.80268 17.91448 24.13343 18.604 17.66209

Deutsche Bank AG 15.68463 13.42587 10.97491 12.39389 8.799836

JPMorgan Chase Bank 30.00638 23.66957 22.53605 32.7424 39.14053

Societe Generale 15.29787 10.61005 13.08971 13.77465 13.54177

BNP Paribas 18.33869 14.45356 18.72151 60.46247 29.50082

The Bank of Nova Scotia 21.6356528 22.3752913 20.699172 18.71046 19.73448

(Table 4.3)

Interpretation:

By analyzing the data of the foreign banks for the past 5 years i.e. from 2004 to 2008 on

the net profit ratios (NPR), I found that during this period net profit ratios of the most of

the foreign banks shows an increase in NPR, excepts ABN Amro Bank, Barclays Bank

and the Bank of Nova Scotia.

Return on Net worth: (Figures in %age)

53

PUBLIC SECTOR BANKS

March2008 March2007 March2006 March2005 March2004

Andhra Bank 17.71 17.04 16.77 28.31 31.90

Bank of Baroda 12.99 11.86 10.54 12.02 18.84

Canara Bank 18.86 17.51 19.13 18.51 26.07

Indian Overseas Bank

25.35 26.04 25.64 26.76 26.56

Oriental Bank of Commerce 14.55 14.76 10.77 22.86 25.63

Punjab National Bank 19.00 15.18 15.86 17.96 23.63

State Bank of India 13.72 14.50 15.94 17.88 18.19

UCO Bank 16.58 14.29 9.89 19.54 29.12

United Bank of India

11.98 11.06 11.18 6.06 0.97

Vijaya Bank 17.15 17.89 7.83 24.77 32.18

(Table 5.1)

Interpretation:

By analyzing the data of the public sector banks for the past 5 years i.e. from 2004 to

2008 on the return on net worth (RONW), I found that during this period most of the

public sector banks show an increase in RONW, except IOB, OBC, SBI & Vijaya Bank.

The main reason for the falls in their RONW is that they are employing their funds either

for the branch expansion or diversifying their business.

(Table 5.2)

54

Interpretation:

By analyzing the data of the public sector banks for the past 5 years i.e. from 2004 to

2008 on the return on net worth (RONW), I found that during this period most of the

leading private sector banks results a decrease in their RONW in the year 2008. The

reason for this can be financial meltdown in the world over economy.

While the newly established private sector banks reported an increase in their RONW. The

reason can be that they are meeting the needs of local people by way of providing loans and

other benefits to SMEs and serving to rural areas.

Banks March2008 March2007 March2006 March2005 March2004

ICICI BANK 8.94 12.79 11.43 15.97 20.43

AXIS BANK 12.21 19.42 16.88 13.89 24.49

YES BANK 15.16 11.98 9.66 -1.73

LAKSHMI VILAS BANK 6.04 4.43 7.72 1.45 18.11

KARUR VYSYA BANK 17.50 15.05 15.52 13.84 22.61

DEVELOPMENT CREDIT BANK 6.04 2.23 -51.92 -82.06 6.56

KOTAK MAHINDRA BANK

8.17 8.50 13.67 11.21 12.98

CITY UNION BANK 17.94 19.63 19.70 19.24 28.11

55

Foreign bankMarch2008 March2007 March2006 March 05 March 04

ABN Amro Bank N.V. 12.93 21.63 16.47 14.25 13.25

Bank of America NA 14.61 11.69 9.63 8.75 7.23

Barclays Bank PLC 0.20 6.57 11.75 8.25 5.23

Citibank N.A. 23.74 17.31 19.19 12.13 9.85

HSBC 28.18 31.35 27.45 25.23 24.25

Deutsche Bank AG 12.39 13.42 9.90 7.25 6.25

JPMorgan Chase Bank 15.19 12.16 17.99 18.29 15.26

Societe Generale 11.19 6.44 5.14 6.29 9.58

BNP Paribas 13.62 10.24 4.38 8.53 5.24

The Bank of Nova Scotia 15.39 16.69 11.30 14.25 12.34

(Table 5.3)

Interpretation:

By analyzing the data of the foreign banks for the past 5 years i.e. from 2004 to 2008 on

the return on net worth (RONW), I found that during this period there is a mixed

response on the decrease & increase in RONW for the year 2007-2008. The banks which

results an decrease in the year 2007 in RONW shows an increase in the year 2008 and

vice versa. The main reason for the increase in the RONW can be that Govt. is now

providing the bailed out packages to save their financial structure. While the other foreign

banks still waiting for the package.

56

PUBLIC SECTOR BANK

March2008 March2007 March2006 March2005 March2004

Andhra Bank 4,567.63 3,453.62 2,885.75 2,669.88 2,778.12

Bank of Baroda 3,916.75 3,332.32 13,133.81 9,548.59 7,293.92

Canara Bank 18,306.70 15,524.19 11,571.85 9,099.08 8,299.02

Indian Overseas Bank

8,358.75 6,082.13 4,693.54 4,494.53 4,455.73

Oriental Bank of Commerce 7,312.89 5,292.95 4,371.72 3,873.84 3,978.68

Punjab National Bank 15,925.65 12,104.24 9,791.12 9,712.63 9,617.34

State Bank of India 56,732.87 43,860.57 37,869.52 36,470.27 37,005.81

UCO Bank 6,872.76 5,337.03 4,401.31 3,723.33 3,616.73

United Bank of India 3,816.37 2,855.89 2,419.99 2,387.59 2,059.52

Vijaya Bank 3,982.08 2,813.97 2,287.27 2,008.28 2,347.31

Total Income:(Rs. In Crores)

(Table 6.1)

Interpretation:

By analyzing the total income data of the public Sector Banks, I found that all the public

sector banks show an increase in their total income y-o-y. The main reason of the

increase in the total income is that they are opening new branches to expand their

business in the rural and urban areas, in order to meet the requirement of the general

public.

57

(Table 6.2)

Interpretation:

By analyzing the total income data of the private Sector Banks, I found that all the private

sector banks show an increase in their total income y-o-y. The main reason of the

increase in their total income is that they are opening new branches to expand their

business in the rural and urban areas, in order to meet the requirement of the general

public.

Banks March2008 March2007 March2006 March2005 March2004

ICICI BANK 39,467.92 28,457.13 17,517.83 11,838.10 10540.20

AXIS BANK 8,750.68 5,461.60 3,594.46 2,299.23 2,115.52

YES BANK 1,590.84 736.75 283.81 47.39

LAKSHMI VILAS BANK 561.51 454.27 352.82 267.17 365.48

KARUR VYSYA BANK 1,276.81 958.28 758.13 630.56 718.77

DEVELOPMENT CREDIT BANK 680.57 406.31 343.61 328.16 430.41

KOTAK MAHINDRA BANK

2,834.38 1,597.99 911.43 552.87 382.58

CITY UNION BANK

624.07 411.16 351.07 300.32 328.03

58

Foreign bank March2008 March2007 March2006 March 05 March 04

ABN Amro Bank N.V. 3682.11 3046.92 2825.13 2415.23 1523.42

Bank of America NA 861.68 662.88 583.21 423.23 312.25

Barclays Bank PLC 1191.34 354.75 287.25 249.25 187.25

Citibank N.A. 8410.11 5729.48 4123.56 3214.52 2514.23

HSBC 7095.89 4720.26 3125.25 2829.23 2125.23

Deutsche Bank AG 2461.71 1625.37 1423.52 1325.25 1025.36

JPMorgan Chase Bank 830.19 451.17 418.13 312.5 215.25

Societe Generale 263.37 208.67 185.26 125.23 105.23

BNP Paribas 712.81 440.03 289.56 123.25 153.25

The Bank of Nova Scotia 468.07 338.99 315.23 289.25 178.52

(Table 6.3)

Interpretation:

By analyzing the total income data of the foreign Banks, I found that all the foreign banks

show an increase in their total income y-o-y. The main reason of the increase in their total

income is that they are opening new branches to expand their business in the urban areas,

in order to meet to expand their operation.

59

NET PROFIT:(Rs. In crores)

PUBLIC SECTOR BANK

March2008 March2007 March2006 March2005 March2004

Andhra Bank 575.57 537.90 485.50 520.10 463.50

Bank of Baroda 204.27 175.55 1,435.52 1,026.46 826.96

Canara Bank 1752.52 1,565.01 1,420.81 1,343.22 1,109.50

Indian Overseas Bank

1,202.34 1,008.43 783.34 651.36 512.76

Oriental Bank of Commerce 353.22 580.81 537.32 726.07 686.07

Punjab National Bank 2,048.76 1,540.08 1,439.31 1,410.12 1,108.69

State Bank of India 6,729.12 4,541.31 4,406.67 4,304.52 3,681.00

UCO Bank 412.16 316.10 196.65 345.65 435.42

United Bank of India 318.95 267.28 -73.87 119.04 19.14

Vijaya Bank 361.28 331.34 126.88 380.57 411.31

(Table 7.1)

Interpretation:

By analyzing the net profit data of the public Sector Banks, I found that all the public

sector banks show an increase in their net profit y-o-y. The main reason of the increase in

the total income is that they are opening new branches to expand their business in the

rural and urban areas, in order to meet the requirement of the general public.

60

Private Banks March2008 March2007 March2006 March2005 March2004

ICICI BANK 4,157.73 3,110.22 2,540.07 2,005.20 1758.12

AXIS BANK 1,071.03 627.23 485.08 334.58 278.31

YES BANK 200.02 94.37 55.32 -3.76

LAKSHMI VILAS BANK 25.27 17.58 22.47 3.34 41.05

KARUR VYSYA BANK 208.33 160.01 135.35 105.34 161.05

DEVELOPMENT CREDIT BANK 33.49 7.37 -85.26 -162.91 -0.38

KOTAK MAHINDRA BANK

293.93 141.37 118.23 84.89 78.73

CITY UNION BANK 101.73 71.81 56.37 46.32 57.04

(Table 7.2)

Interpretation:

By analyzing the net profit data of the private Sector Banks, I found that all the private

sector banks show an increase in their net profit y-o-y. The main reason of the increase in

their total income is that they are opening new branches to expand their business in the

rural and urban areas, in order to meet the requirement of the general public.

61

Foreign bank March2008 March2007 March2006 March 05 March 04

ABN Amro Bank N.V. 280.67 385.35 315.24 154.24 125.36

Bank of America NA 305.23 195.54 205.25 169.25 135.24

Barclays Bank PLC 6.15 91.07 45.06 35.02 15.23

Citibank N.A. 1804.26 900.00 884.52 654.23 445.23

HSBC 1192.30 845.61 754.23 526.35 375.36

Deutsche Bank AG 386.11 218.22 156.23 164.25 90.23

JPMorgan Chase Bank 249.11 106.79 94.23 102.32 84.25

Societe Generale 40.29 22.14 24.25 17.25 14.25

BNP Paribas 130.72 63.60 54.21 74.52 45.21

The Bank of Nova Scotia 101.27 75.85 65.25 54.12 35.23

(Table 7.3)

Interpretation:

By analyzing the net profit data of the foreign Banks, I found that all the foreign banks

show an increase in their net profit y-o-y. The main reason of the increase in their total

income is that they are opening new branches to expand their business in the urban areas,

in order to meet to expand their operation.

62

OBJECTIVE 2: To study the market performance of the various sector

banks i.e. Public, Private & Foreign Banks.

Market performance of Private Sector Banks

0500

10001500

Quaters

Mar

ket P

rices

of

the

shar

es

ICICI Bank

AXIS Bank

Yes Bank

LakshmiVilasBankKarurVysyaBankDevelopment CreditBankKotakMahindraBankCity UnionBank

(Chart 2.1)

63

Market Performance of Public Sector Banks

0500

1000150020002500

Quaters

Mar

ket p

rices Andhra Bank

Bank of Baroda

Canara Bank

IOB

OBC

PNB

SBI

UCO Bank

United Bank ofIndiaVijaya Bank

(Chart 2.2)

Market Performance of Foreign Banks

020406080

100120140160

Quaters

Mar

ket P

rices

Bank of America

Barclays Bank

BNP Paribas

CITI Bank

Deutsche BankAGJP MorganChase BankThe Bank ofNova ScotiaHSBC

ABN Amro Bank

SocieteGenerale

(Chart 2.3)

64

INTERPRETATION:

By analyzing the market performance of the Indian banking sector banks, I found that

during the year 2008 all the banks market performance shows a decline at the market. In

the beginning of the first quarter of the 2009 still the banks are unable to recover. The

reason can be that during this period the stock market shows a huge decline due to the

withdrawal made by the FIIs. In the beginning of the 2007 the most of the banks attains

their peak levels as the market also attain the 21000 mark. Govt. taking all the necessary

steps to improve the performances of the banks but the condition of the market is so

worse that it’s having no impact on the performance of the banks.

Moreover, the RBI's use of reserve ratios, statutory liquidity ratio and cash reserve ratio

as monetary policy tools affected banks' profitability: No interest is paid on CRR

balances, and the interest yield on SLR securities is far lower than the yields on advances.

By the time the RBI relaxed reserve requirements in October 2008, reducing CRR and

SLR to 5 per cent and 24 per cent respectively -- from 9 per cent and 25 per cent -- the

effect on banks' profitability was already apparent.

For these reasons, after 2004-05, when banks' net profitability margin peaked at 1.63 per

cent, their core profitability has been on a declining trend; by 2007-08, it had reached

1.40 per cent.

65

OBJECTIVE 3: Impact of the recent slowdown on the Indian banking

sector

The Indian banking industry, which till now was considered to be insulated from the

global crisis, may see the staggering impact of the slowdown. As per the considerations

of Associated Chambers of Commerce and Industry (Assoc ham), the sector has shown

negative trends in the results of the second quarter.

Analyzing the quarterly results of 25 Indian banks on Bombay Stock Exchange (BSE),

India's apex chamber of commerce saw that while there is a 24 percent rise in the net non

performing assets, there is a slip in the capital adequacy ratio (CAR) from 13.41 percent

in FY08 to 12.68 percent in Q2 FY09. The non-performing assets (NPA) increased from

66

Rs.15, 462.84 FY 08 to Rs.17, 522.82 crore, with Karur Vysya Bank recording the

highest rise of 275.36 percent, from Rs.13.33 crore in Q2-07 to Rs.50.03 crore in Q2-FY

09. However, 16 banks of those analyzed saw a fall in their CAR from the previous

fiscal, with Axis bank registered the maximum decline in CAR from 17.59 percent in Q2

FY 08 to 12.2 percent in Q2 FY 09. But there were banks like Yes Bank, City Union

Bank, Karnataka Bank and Dena Bank who recorded a high CAR.

The 25 banks analyzed include 15 public sector banks (PSBs) and 10 private sector banks

and among them seven major PSBs recorded a significant decrease in net NPAs,

including Central Bank of India (-87.39 percent), Oriental bank of Commerce (-82.18

percent), Union Bank of India (-73.38 percent), Dena Bank (-17.24 percent), Bank of

India (-14.80 crore), Bank of Maharashtra (-7.75 crore) and Indian Bank (-1.54 percent)

have shown improvement in net NPA levels. Whereas, among the private sector banks

only South Indian Bank registered an improvement in net NPAs by -29.82 percent.

At a time when banks across countries have witnessed a sharp setback as a result of the

global financial crisis, the Indian banking system has demonstrated much resilience. It

had no direct exposures to any global toxic assets and has so far handled the financial

crisis relatively better, thanks to prudential measures taken by the Reserve Bank of India.

In the last five years, demand for credit (bank credit in the last five years grew at around

30 per cent annually) has grown in the same proportion as the growth in Indian economy

(measured as GDP). However, the RBI’s cautious stance helped rein in the otherwise

rapid-fire growth witnessed by the sector. The RBI used a variety of instruments such as

Market Stabilisation Scheme bonds, Liquid Adjustment Facility, Cash Reserve Ratio and

Statutory Liquidity Ratio levers to ensure banks functioned in a well-regulated

environment.

The first three quarters of this fiscal were eventful for the banking system, starting with

farmer debt waiver, derivative controversy, successive repo and CRR rate hikes, peaking

yield followed by huge liquidity infusion post-Lehman Brothers’ failure (which further

deepened global liquidity crunch).

67

Advances Growth

With the economy witnessing a slowdown, it may be logical to ask how the banking

credit is yet to slow down. According to the RBI, the advances of all scheduled

commercial banks grew at a healthy 24 per cent till end of December 2008 compared to

the year-ago numbers. In the same period, deposits grew by 21 per cent. The major

contributor to the credit growth was corporate credit just as term deposits aided deposit

growth.

The primary reason for this growth is that with all other sources of income almost dried

up, bank credit is one of the few sources of funding which most of the industries are able

to access. With corporate bonds’ spreads currently being very high, bank credit remains a

relatively cheap source of credit. Higher pricing power, at a time of fund crunch, has

helped banks post higher advances growth and higher yield on advances which, in turn,

helped sustain margins over the last few quarters. Further, the stimulus packages are also

likely to support the credit growth. Higher margins in turn led to steady profit growth.

Steady profit growth

Consider the nine months of FY09 – net profit of 37 listed banks grew at 24 per cent. The

robust net profit growth can be attributed to a 30 per cent growth in net interest income

and a 17 per cent growth in other income. Profit of the banks would have been higher but

for higher provisions and contingencies mainly on account of mark-to-market and asset

quality provisions.

The current economic slowdown may yet pose a challenge in sustaining this high net

profit growth. However, some banks such as Punjab National Bank, HDFC Bank and

Axis Bank, aided by a higher proportion of low-cost deposits and higher net interest

margin, may be in a better position to sustain similar growth.

68

Asset Quality concerns

Asset quality is a cause for concern for most of the banks, with banks such as ICICI

Bank, HDFC Bank, Kotak Mahindra Bank witnessing an increase in the proportion of

NPAs. Unsecured retail loan delinquencies contributed to higher slippages. In some

cases, advances to SMEs have also seen some delinquencies. Could the marginally

deteriorating asset quality pose a systemic risk? Not necessarily.

Most banks have capital adequacy ratio of more than 12 per cent and to further strengthen

the banking sector, the government has come up with re-capitalisation package worth Rs

20,000 crore.

This apart, restructuring of loans and interest rate cuts beginning to be resorted to, in

recent times, can also partially help maintain asset quality. This said, sound fundamentals

of the ‘real sector’ would be the key determinant of asset quality over the long term.

The current slowdown in the real sector can hurt the financial sector in terms of asset

quality as well as lower demand.

To tackle this, some banks have resorted to lowering lending rates, especially in the

housing space, making home loans cheaper.

Facts and figures:

Performance of foreign Banks in terms of profitability:

Foreign bank Mar-08 Mar-07 %age change

ABN Amro Bank N.V.

280.67 385.35 -27.16491501

Bank of America NA

305.23 195.54 56.09593945

Barclays Bank PLC

6.15 91.07 -93.24695289

69

Citibank N.A. 1804.26 900 100.4733333

HSBC 1192.3 845.61 40.9988056

Deutsche Bank AG 386.11 218.22 76.93611951

JPMorgan Chase Bank

249.11 106.79 133.2709055

Societe Generale 40.29 22.14 81.97831978

BNP Paribas 130.72 63.6 105.5345912

The Bank of Nova Scotia

101.27 75.85 33.51351351

(Table 8.1)

Performance of public Sector Banks in terms of profitability:

PUBLIC SECTOR

BANKS

Mar-08 Mar-07 %age change

Andhra Bank 575.57 537.9 7.003160439

Bank of Baroda 204.27 175.55 16.36001139

Canara Bank 252.52 1,565.01 -83.86463984

70

Indian Overseas

Bank

1,202.34 1,008.43 19.22890037

Oriental Bank of

Commerce

353.22 580.81 -39.18493139

Punjab National

Bank

2,048.76 1,540.08 33.02945302

State Bank of India 6,729.12 4,541.31 48.17574665

UCO Bank 412.16 316.1 30.38911737

United Bank of

India

318.95 267.28 19.33178689

Vijaya Bank 361.28 331.34 9.036035492

(Table 8.2)

Performance of private Sector Banks in terms of profitability:

PRIVATE

SECTOR BANKS

Mar-08 Mar-07 %age change

ICICI BANK 4,157.73 3,110.22 33.67961109

AXIS BANK 1,071.03 627.23 70.75554422

71

YES BANK 200.02 94.37 111.9529511

LAKSHMI VILAS

BANK

25.27 17.58 43.74288965

KARUR VYSYA

BANK

208.33 160.01 30.19811262

DEVELOPMENT

CREDIT BANK

33.49 7.37 354.4097693

KOTAK

MAHINDRA

BANK

293.93 141.37 107.9153993

CITY UNION

BANK

101.73 71.81 41.6655062

(Table 8.3)

OBJECTIVE 4: Recent banking developments in India

The Indian banking sector has witnessed wide-ranging changes under the influence of the

financial sector reforms initiated during the early 1990s. The approach to such reforms in

India has been one of gradual and non-disruptive progress through a consultative process.

The emphasis has been on deregulation and opening up the banking sector to market

forces. The Reserve Bank has been consistently working towards the establishment of an

72

enabling regulatory framework with prompt and effective supervision as well as the

development of technological and institutional infrastructure.

Persistent efforts have been made towards adoption of international benchmarks as

appropriate to Indian conditions. While certain changes in the legal infrastructure are yet

to be effected, the developments so far have brought the Indian financial system closer to

global standards.

Statutory Pre-emption

In the pre-reforms phase, the Indian banking system operated with a high level of

statutory pre-emption, in the form of both the Cash Reserve Ratio (CRR) and the

Statutory Liquidity Ratio (SLR), reflecting the high level of the country’s fiscal deficit

and its high degree of magnetization. Efforts in the recent period have been focused on

lowering both the CRR and SLR. The statutory minimum of

25 per cent for the SLR was reached as early as 1997, and while the Reserve Bank

continues to pursue its medium-term objective of reducing the CRR to the statutory

minimum level of 3.0 per cent, the CRR of the Scheduled Commercial Banks (SCBs) is

currently placed at 5.0 per cent of NDTL (net demand and time liabilities). The

legislative changes proposed by the Government in the Union

Budget, 2005-06 to remove the limits on the SLR and CRR are expected to provide

freedom to the Reserve Bank in the conduct of monetary policy and also lend further

flexibility to the banking system in the deployment of resources.

Interest Rate Structure

Deregulation of interest rates has been one of the key features of financial sector reforms.

In recent years, it has improved the competitiveness of the financial environment and

strengthened the transmission mechanism of monetary policy. Sequencing of interest rate

deregulation has also enabled better price discovery and imparted greater efficiency to the

73

resource allocation process. The process has been gradual and predicated upon the

institution of prudential regulation of the banking system, market behavior, financial

opening and, above all, the underlying macroeconomic conditions.

Interest rates have now been largely deregulated except in the case of:

(i) Savings deposit accounts;

(ii) Non-resident Indian (NRI) deposits;

(iii) Small loans up to Rs.2 lakh; and

(iv) Export credit.

After the interest rate deregulation, banks became free to determine their own lending

interest rates.

As advised by the Indian Banks’ Association (a self-regulatory organization for banks),

commercial banks determine their respective BPLRs (benchmark prime lending rates)

taking into consideration:

(i) Actual cost of funds;

(ii) Operating expenses; and

(iii) A minimum margin to cover regulatory requirements of provisioning and

capital charge and profit margin. These factors differ from bank to bank and

feed into the determination of BPLR and spreads of banks. The BPLRs of

public sector banks declined to 10.25-11.25 per cent in March 2005 from

10.25-11.50 per cent in March 2004.

With a view to granting operational autonomy to public sector banks, public ownership in

these banks were reduced by allowing them to raise capital from the equity market of up

to 49 per cent of paid-up capital. Permitting new private sector banks and more liberal

entry of branches of foreign banks, joint-venture banks and insurance companies is

fostering competition. Recently, a roadmap for the presence of foreign banks in India was

released which sets out the process of the gradual opening-up of the banking sector in a

74

transparent manner. Foreign investments in the financial sector in the form of Foreign

Direct Investment (FDI) as well as portfolio investment have been permitted.

Furthermore, banks have been allowed to diversify product portfolio and business

activities. The share of public sector banks in the banking business is going down,

particularly in metropolitan areas. Some diversification of ownership in select public

sector banks has helped further the move towards autonomy and thus provided some

response to competitive pressures. Transparency and disclosure standards have been

enhanced to meet international standards in an ongoing manner.

Prudential Regulation

Prudential norms related to risk-weighted capital adequacy requirements, accounting,

income recognition, provisioning and exposure were introduced in 1992 and gradually

these norms have been brought up to international standards. Other initiatives in the area

of strengthening prudential norms include measures to strengthen risk management

through recognition of different components of risk, assignment of risk-weights to

various asset classes, norms on connected lending and risk concentration, application of

the mark-to-market principle for investment portfolios and limits on deployment of funds

in sensitive activities.

Keeping in view the Reserve Bank’s goal to achieve consistency and harmony with

international standards and our approach to adopt these standards at a pace appropriate to

our context, it has been decided to migrate to Basel II. Banks are required to maintain a

minimum CRAR (capital to risk weighted assets ratio) of 9 per cent on an ongoing basis.

The capital requirements are uniformly applied to all banks, including foreign banks

operating in India, by way of prudential guidelines on capital adequacy. Commercial

banks in India will start implementing Basel II with effect from March 31,

2007. They will initially adopt the Standardized Approach for credit risk and the Basic

Indicator

Approach for operational risk. After adequate skills have been developed, at both

bank and supervisory level, some banks may be allowed to migrate to the Internal

Ratings-Based (IRB)

75

Approach. Banks have also been advised to formulate and operational the Capital

Adequacy

Assessment Process (CAAP) as required under Pillar II of the New Framework.

Some of the other regulatory initiatives relevant to Basel II that have been implemented

by the Reserve Bank are:

Ensuring that banks have a suitable risk management framework oriented towards

their requirements and dictated by the size and complexity of their business, risk

philosophy, market perceptions and expected level of capital.

Introducing Risk-Based Supervision (RBS) in select banks on a pilot basis.

Encouraging banks to formalize their CAAP in alignment with their business plan

and performance budgeting system. This, together with the adoption of RBS,

should aid in fulfilling the Pillar II requirements under Basel II.

Expanding the area of disclosures (Pillar III) so as to achieve greater transparency

regarding the financial position and risk profile of banks.

Building capacity to ensure the regulator’s ability to identify eligible banks and

permit them to adopt IRB/Advanced Measurement approaches.

With a view to ensuring migration to Basel II in a non-disruptive manner, a

consultative and participative approach has been adopted for both designing and

implementing the New Framework. A

Steering Committee comprising senior officials from 14 banks (public, private and

foreign) with representation from the Indian Banks’ Association and the Reserve Bank

has been constituted. On the basis of recommendations of the Steering Committee, draft

guidelines on implementation of the New Capital Adequacy Framework have been issued

to banks.

In order to assess the impact of Basel II adoption in various jurisdictions and re-calibrate

the proposals, the BCBS is currently undertaking the Fifth Quantitative Impact Study

(QIS 5). India will be participating in the study, and has selected 11 banks, which form a

representative sample for this purpose. These banks account for 51.20 per cent of market

share in terms of assets. They have been advised to familiarize themselves with the QIS 5

76

requirements to enable them to participate in the exercise effectively. The Reserve Bank

is currently focusing on the issue of recognition of the external rating agencies for use in

the Standardized Approach for credit risk.

As a well-established risk management system is a pre-requisite for implementation of

advanced approaches under the New Capital Adequacy Framework, banks were required

to examine the various options available under the Framework and draw up a roadmap

for migration to Basel II. The feedback received from banks suggests that a few may be

keen on implementing the advanced approaches.

However, not all are fully equipped to do so straightaway and are, therefore, looking to

migrate to the advanced approaches at a later date. Basel II provides that banks should be

allowed to adopt/migrate to advanced approaches only with the specific approval of the

supervisor, after ensuring that they satisfy the minimum requirements specified in the

Framework, not only at the time of adoption/migration, but on a continuing basis. Hence,

banks desirous of adopting the advanced approaches must perform a stringent assessment

of their compliance with the minimum requirements before they shift gears to migrate to

these approaches. In this context, current non-availability of acceptable and qualitative

historical data relevant to internal credit risk ratings and operational risk losses, along

with the related costs involved in building up and maintaining the requisite database, is

expected to influence the pace of migration to the advanced approaches available under

Basel II.

Exposure Norms

The Reserve Bank has prescribed regulatory limits on banks’ exposure to individual and

group borrowers to avoid concentration of credit, and has advised banks to fix limits on

their exposure to specific industries or sectors (real estate) to ensure better risk

management. In addition, banks are also required to observe certain statutory and

regulatory limits in respect of their exposures to capital markets.

Asset-Liability Management

In view of the growing need for banks to be able to identify, measure, monitor and

control risks, appropriate risk management guidelines have been issued from time to time

77

by the Reserve Bank, including guidelines on Asset-Liability Management (ALM). These

guidelines are intended to serve as a benchmark for banks to establish an integrated risk

management system. However, banks can also develop their own systems compatible

with type and size of operations as well as risk perception and put in place a proper

system for covering the existing deficiencies and the requisite upgrading.

Detailed guidelines on the management of credit risk, market risk, operational risk, etc.

have also been issued to banks by the Reserve Bank.

The progress made by the banks is monitored on a quarterly basis. With regard to risk

management techniques, banks are at different stages of drawing up a comprehensive

credit rating system, undertaking a credit risk assessment on a half yearly basis, pricing

loans on the basis of risk rating, adopting the Risk-Adjusted Return on Capital (RAROC)

framework of pricing, etc. Some banks stipulate a quantitative ceiling on aggregate

exposures in specified risk categories; analyze rating-wise distribution of borrowers in

various industries, etc.

In respect of market risk, almost all banks have an Asset-Liability Management

Committee. They have articulated market risk management policies and procedures, and

have undertaken studies of Behavioral maturity patterns of various components of

on-/off-balance sheet items.

NPL Management

Banks have been provided with a menu of options for disposal/recovery of NPLs (non-

performing loans). Banks resolve/recover their NPLs through compromise/one time

settlement, filing of suits, Debt

Recovery Tribunals, the Lok Adalat (people’s court) forum, Corporate Debt

Restructuring (CDR), sale to securitisation/reconstruction companies and other banks or

to non-banking finance companies

(NBFCs). The promulgation of the Securitisation and Reconstruction of Financial Assets

and Enforcement of Security Interest (SARFAESI) Act, 2002 and its subsequent

amendment have strengthened the position of creditors. Another significant measure has

78

been the setting-up of the Credit Information Bureau for information sharing on

defaulters and other borrowers. The role of Credit Information Bureau of India Ltd.

(CIBIL) in improving the quality of credit analysis by financial institutions and banks

need hardly be overemphasized. With the enactment of the Credit Information

Companies (Regulation) Act, 2005, the legal framework has been put in place to facilitate

the full-fledged operationalisation of CIBIL and the introduction of other credit bureaus.

Board for Financial Supervision (BFS)

An independent Board for Financial Supervision (BFS) under the aegis of the Reserve

Bank has been established as the apex supervisory authority for commercial banks,

financial institutions, urban banks and NBFCs. Consistent with international practice; the

Board’s focus is on offsite and on-site inspections and on banks’ internal control systems.

Offsite surveillance has been strengthened through control returns. The role of statutory

auditors has been emphasized with increased internal control through strengthening of the

internal audit function. Significant progress has been made in implementation of the Core

Principles for Effective Banking Supervision. The supervisory rating system under

CAMELS has been established, coupled with a move towards risk-based supervision.

Consolidated supervision of financial conglomerates has since been introduced with bi-

annual discussions with the financial conglomerates. There have also been initiatives

aimed at strengthening corporate governance through enhanced due diligence on

important shareholders, and fit and proper tests for directors.

A scheme of Prompt Corrective Action (PCA) is in place for attending to banks showing

steady deterioration in financial health. Three financial indicators, viz. capital to risk-

weighted assets ratio

(CRAR), net non-performing assets (net NPA) and Return on Assets (RoA) have been

identified with specific threshold limits. When the indicators fall below the threshold

79

level (CRAR, RoA) or go above it (net Naps), the PCA scheme envisages certain

structured/discretionary actions to be taken by the regulator.

The structured actions in the case of CRAR falling below the trigger point may include,

among other things, submission and implementation of a capital restoration plan,

restriction on expansion of risk weighted assets, restriction on entering into new lines of

business, reducing/skipping dividend payments, and requirement for recapitalisation.

The structured actions in the case of RoA falling below the trigger level may include,

among other things, restriction on accessing/renewing costly deposits and CDs, a

requirement to take steps to increase fee-based income and to contain administrative

expenses, not to enter new lines of business, imposition of restrictions on borrowings

from the inter bank market, etc.

In the case of increasing net Naps, structured actions will include, among other things,

undertaking a special drive to reduce the stock of Naps and containing the generation of

fresh Naps, reviewing the loan policy of the bank, taking steps to upgrade credit appraisal

skills and systems and to strengthen follow-up of advances, including a loan review

mechanism for large loans, following up suit-filed/decreed debts effectively, putting in

place proper credit risk management policies/processes/procedures/prudential limits,

reducing loan concentration, etc.

Discretionary action may include restrictions on capital expenditure, expansion in staff,

and increase of stake in subsidiaries. The Reserve Bank/Government may take steps to

change promoters/ ownership and may even take steps to merge/amalgamate/liquidate the

bank or impose a moratorium on it if its position does not improve within an agreed

period.

Technological Infrastructure

In recent years, the Reserve Bank has endeavored to improve the efficiency of the

financial system by ensuring the presence of a safe, secure and effective payment and

settlement system. In the process, apart from performing regulatory and oversight

functions the Reserve Bank has also played an important role in promoting the system’s

80

functionality and modernization on an ongoing basis. The consolidation of the existing

payment systems revolves around strengthening computerized cheque clearing, and

expanding the reach of Electronic Clearing Services (ECS) and Electronic Funds

Transfer (EFT). The critical elements of the developmental strategy are the opening of

new clearinghouses, interconnection of clearinghouses through the Indian Financial

Network (INFINET) and the development of a Real-Time Gross Settlement (RTGS)

System, Centralized Funds Management

System (CFMS), a Negotiated Dealing System (NDS) and the Structured Financial

Messaging System

(SFMS). Similarly, integration of the various payment products with the systems of

individual banks has been another thrust area.

An Assessment

These reform measures have had a major impact on the overall efficiency and stability of

the banking system in India. The dependence of the Indian banking system on volatile

liabilities to finance its assets is quite limited, with the funding volatility ratio at -0.17 per

cent as compared with a global range of -0.17 to 0.11 per cent. The overall capital

adequacy ratio of banks at end-March 2005 was

12.8 per cent as against the regulatory requirement of 9 per cent which itself is higher

than the Basel norm of 8 per cent. The capital adequacy ratio was broadly comparable

with the global range. There has been a marked improvement in asset quality with the

percentage of gross Naps to gross advances for the banking system declining from 14.4

per cent in 1998 to 5.2 per cent in 2005.

Globally, the NPL ratio varies widely from a low of 0.3 per cent to 3.0 per cent in

developed economies, to over 10.0 per cent in several Latin American economies. The

reform measures have also resulted in an improvement in the profitability of banks. RoA

rose from 0.4 per cent in the year

81

1991-92 to 0.9 percent in 2004-05. Considering that, globally, RoA was in the range -1.2

to 6.2 per cent for 2004, Indian banks are well placed. The banking sector reforms have

also emphasized the need to review manpower resources and rationalize requirements by

drawing up a realistic plan so as to reduce operating cost and improve profitability. The

cost to income ratio of 0.5 per cent for Indian banks compares favorably with the global

range of 0.46 per cent to 0.68 per cent and vis-à-vis 0.48 per cent to 1.16 per cent for the

world’s largest banks.

In recent years, the Indian economy has been undergoing a phase of high growth coupled

with internal and external stability characterized by price stability, fiscal consolidation,

overall balance of payments alignment, improvement in the performance of financial

institutions and stable financial market conditions and the service sector taking an

increasing share, enhanced competitiveness, increased emphasis on infrastructure,

improved market microstructure, an enabling legislative environment and significant

capital inflows. This has provided the backdrop for a more sustained development of

financial markets and reform.

82

Chapter-5Findings of the study ConclusionsLimitations Recommendations and Suggestions

Findings of the study:

The private sector banks have made tremendous strides in the last few years. It was in

mid 1990's when Indian banking scenario witnessed the entry of some new private sector

banks and in the period between 2002 -2007 these banks have grown by leaps and

bounds. They have increased their incomes, asset sizes and outperformed their public

sector counterparts in many areas.

Macroeconomic headwinds in 2006-07 and 2007-08 have resulted in substantial

fluctuations in banks' profitability. Rising interest rates in 2006-07 and the first half of

83

2008-09 raised banks' overall cost of borrowings; as yields on advances and investments

did not keep pace, banks' profitability suffered.

Moreover, the RBI's use of reserve ratios, statutory liquidity ratio?and cash reserve ratio

as monetary policy tools affected banks' profitability: No interest is paid on CRR

balances, and the interest yield on SLR securities is far lower than the yields on advances.

By the time the RBI relaxed reserve requirements in October 2008, reducing CRR and

SLR to 5 per cent and 24 per cent respectively -- from 9 per cent and 25 per cent -- the

effect on banks' profitability was already apparent.

For these reasons, after 2004-05, when banks' net profitability margin peaked at 1.63 per

cent, their core profitability has been on a declining trend; by 2007-08, it had reached

1.40 per cent.

This growth was accompanied by a rapid branch expansion. The network of private

sector bank grew at almost three times of all scheduled commercial banks and more than

four times that of public sector banks. The star performers among these banks were the

HDFC Bank, ICICI Bank, and the Axis Bank. These big four expanded their branch

network at a rapid rate of 14-16 percent per annum in terms of compound growth rates.

Another trend in the banking sector during this period was the increase in staff strength

by private sector banks, while the public sector banks and foreign banks witnessed a

decline in the number of employees. The private sector banks recorded a compounded

growth of 24% in their staff strength. The decline in public sector bank staff can be

attributed to restructuring and adoption of IT infrastructure.

Rising Cost Of Deposits For Banks:

The hardening of interest rates, acting in combination with a steady increase in CRR

between 2004-05 and 2007-08 resulted in an across-the-board increase in banks' overall

cost of resources.

84

Further, strong credit growth, and a shift in the deposit-mix towards expensive term-

deposits, added to the pressure on banks' CoB. The Indian banking system experienced

credit growth averaging 28 per cent annually between 2002-03 and 2006-07.

To fund credit growth, banks started vying for big-ticket term-deposits. In addition, the

tenure of term deposits started shrinking. Because interest rates were increasing, banks

were forced to re-price deposits at renewal. Pricing pressure and a paucity of retail

deposits compelled banks to offer higher interest rates on retail term-deposits.

The double impact of business-led upward pressure on cost of deposits, and tighter

monetary policies, saw banks' cost of deposits rise to 6.1 per cent in 2007-08, from 5.1

per cent in 2006-07.

Yields Fail to Play Catch-Up

RBI's liquidity tightening measures, especially the increase in CRR, left no option for

banks but to increase prime lending rates. Between 2005-06 and 2007-08, banks

increased their PLRs by 150 to 200 bps, causing yields on advances to increase to 8.56

per cent in 2007-08 from 7.92 per cent in 2006-07.

Although yields did increase to some extent, they did not keep pace with the sharp

increase in CoB. Banks also suffered because of the negative carry on SLR portfolios, as

term-deposit rates rose faster than yields on incremental SLR portfolios (yield on 10-year

government securities moved in the range of 7.48-8.32 per cent during 2007-08).

The combined effect of increasing CoB, negative carry on SLR portfolios, and zero

interest on CRR, was to severely constrain banks' spreads. The system average interest

spread declined by 32 bps, to 2.31 per cent in 2007-08, from 2.63 per cent in 2006-07.

Fee-Income Growth to Moderate

Since 2003-04, banks have reported strong growth in fee revenues, a trend primarily led

by private banks' focus on retail credit, distribution of third-party products such as

insurance and mutual funds, and provision of wealth management services.

85

After 2004-05, public sector banks also focused increasingly on fee-income generation as

the contribution from treasury operations declined.

Sustained growth in retail credit (where banks charge up-front processing fees), and

buoyant capital markets, enabled the banking sector to increase the proportion of fee-

based income (as a percentage of average funds deployed) to 1.14 per cent in 2007-08,

from 1 per cent in 2005-06. CRISIL expects the contribution of fee-based income to

banks' total income to reduce to around 1.09 per cent in 2008-09, and further to 1.05 per

cent in 2009-10, on account of the slowdown in retail credit growth, and weaker

distribution income because of sluggish capital market conditions.

Opex Unlikely to Reduce

Most public sector banks have sought to rein in their operating expenditure (Opex) by

investing substantially in the implementation of core banking solutions, which will allow

banks to reduce their operating expenses over the medium-term - because of greater

operational integration and real-time processing of transactions.

However, public sector banks' operating expenses may increase over the next 18 months,

on account of wage revisions due from November 2007.

Core profitability to decline

Equities: Between 2005-06 and 2007-08, banks recorded a significant growth in profits

on sale of investments on account of buoyant equity markets. However, equity prices

have declined sharply since January 2008.

Debt: In the past, banks also booked huge gains on their large bond portfolios when

yields were falling. However, banks had to provide for mark-to-market losses in 2007-08

and the first quarter of 2008-09 as yields increased.

A sharp fall in yields on government securities during the third quarter of 2008-09, after

the repo rate cuts by RBI, helped Indian banks register a high level of income from POSI

on debt.

86

The subsequent increase in the interest rates during the fourth quarter of 2008-09 could

negate the benefit of treasury gains booked in the previous quarter, and significantly

affect profits for 2008-09.

The economic slowdown, declining spreads, and lower fee-income, are expected to result

in weakening profitability for Indian banks over the next two years.

Private sector recorded a growth ranging from 30% to 68% in terms of capital, reserves

and surplus. The deposits increased in the range of 32% to 51%, while the advances

showed a growth trend between 39% to 71%. The net profits by private sector banks

recorded a compound annual growth of 27% to 36%. The table used for the study shows

the progress of private sector banks.

But if we talk about the performance of the Indian banking sector in the year 2008, public

sector banks were reported as the best bank in terms of profitability, incomes and

deposits. The data of the performance of the Indian banking sector are shown below

which is published by the banking annual report of the business standard:

ASSETS: Rs.42, 76,328cr (in 2008)

Public Sector Bank, 70.17%

Private Sector Bank, 21.29%

Foreign Banks, 8.53%

Public Sector Bank

Private Sector Bank

Foreign Banks

ADVANCES: Rs.24, 47,944 cr (in 2008)

87

Public Sector Bank, 72.93%

Private Sector Bank, 20.46%

Foreign Banks, 6.61%

Public Sector Bank

Private Sector Bank

Foreign Banks

NET PROFITS: Rs 42,506 cr (in 2008)

Public Sector Bank, 62.44%

Private Sector Bank, 22.03%

Foreign Banks, 15.53%

Public Sector Bank

Private Sector Bank

Foreign Banks

Conclusions

Since the process of liberalization and reform of the financial in the financial sector were

introduced in 1991, banking sector has undergone major transformation. The underlying

objectives of the reform were to make the banking system more competitive, productive

and profitable. As per the IBA report “Banking Industry Vision 2010” there would be

greater presence of international players in the Indian Financial system and some of the

Indian banks would become international players in the coming years. The key to success

in the competitive environment is increased productivity and profitability. Indian banks

especially the public sector banks and the old private sector banks are lagging far behind

their competitors in terms of both productivity and profitability with the exception of the

88

State bank of India and its associates. The other public sector banks and old private sector

banks need to go for the major transformation program for increase their productivity and

profitability. I suggests three point program – reduce overstaffing, forge strategic alliance

with the rural regional banks to open up rural branches and increased use of technology

for improved products and services for the same. In order to compete with the economic

slowdown the bank should follows the RBI measures. Between 2005-06 and 2007-08,

banks recorded a significant growth in profits on sale of investments on account of

buoyant equity markets. However, equity prices have declined sharply since January

2008. In the past, banks also booked huge gains on their large bond portfolios when

yields were falling. However, banks had to provide for mark-to-market losses in 2007-08

and the first quarter of 2008-09 as yields increased. A sharp fall in yields on government

securities during the third quarter of 2008-09, after the repo rate cuts by RBI, helped

Indian banks register a high level of income from POSI on debt. The subsequent increase

in the interest rates during the fourth quarter of 2008-09 could negate the benefit of

treasury gains booked in the previous quarter, and significantly affect profits for 2008-09.

The economic slowdown, declining spreads, and lower fee-income, are expected to result

in weakening profitability for Indian banks over the next two years. The subsequent

increase in the interest rates during the fourth quarter of 2008-09 could negate the benefit

of treasury gains booked in the previous quarter, and significantly affect profits for 2008-

09. RBI is taking steps time to time in order to cope with the economic slowdown. In

order to this they have reduced many key rates. So in future it is expected that the indian

banks definitely recover from this financial turmoil.

Limitation of the study:

Time constraint is one of the limiting factors to conduct this study properly.

Non availability of the data on productivity of the banks as well as the capital

adequacy ratio data for the period 2004 and 2005.

Finding of the study is made on the basis of the analysis of the banks taken for the

study and it can vary from person to person.

89

The samples of the banks are taken on the convenience basis so as to meet the

objectives of the study.

Recommendations and Suggestions:

Productivity and profitability are interrelated. Though productivity is not the sole factor,

it is an important factor influencing profitability. The key to increase profitability is

increased productivity. Public sector banks have not been as profitable as the other banks

up to 2007 primarily because of two reasons – Low Productivity and High Burden ratio.

To overcome these drawbacks Public sector banks should chalk out a program to increase

productivity. We have the following suggestions for the private sector banks.

They should reduce overstaffing – Though public sector banks have been trying to

reduce the number of staff employed and has been successful in reducing the

90

number from 8.73 lakhs to 7.52 lakhs, but they need to improve further. They

should go for a second round of VRS to reduce the staff further.

They should have a strategic tie up with the rural regional banks- for reaching the

far-fetched areas instead of opening branches themselves in the areas which

cannot provide them the break even business’s they should embrace latest

technology

Indian public sector banks have a unique advantage over their competition in

terms of their branch network and the large customer base, but it is the use of

technology that will enable PSBs to build on their strengths. Foreign banks and

the new private sector banks have embraced technology right from their inception

and they have better adapted themselves to the changes in technology. Where as

the public sector banks and old private banks have been slow in keeping pace with

the changing technology, which is regarded as one of the major reason affecting

their profitability and productivity

As in the year 2008 RBI has prescribed that the Public sector banks have to

maintain minimum 12% CAR in order to cope with the world over financial

turmoil and its impact on the Indian economy. During the year 2008 RBI infuses

the extra stimulus package to the public sector banks to improve their CAR to

12% mark, so as the can meets the financial requirements of the Indian economy

during the recessionary period.

As the RBI is taking the steps time to time to cope with the financial meltdown,

for this they have reduced many rates e.g. CRR (9%-5%), Repo rate (9%-4.75%),

Reverse repo rate (6%-3.25%), SLR (25%-24%). So the banks should also tries to

reduce their PLR in order to compensate the rate cut made by the RBI.

91

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Public sector banks market performance data:

DATE Andhra Bank

Bank of Baroda

Canara Bank

IOB OBC PNB SBI

31/03/2009 44.95 234.55 165.90 45.50 109.90 410.90 1,066.55

31/12/2008 55.10 280.45 187.80 71.75 153.55 526.20 1,288.25

30/09/2008 55.00 297.55 188.75 91.70 148.25 475.35 1,465.65

30/06/2008 54.95 203.25 178.00 79.80 128.90 377.25 1,111.45

31/03/2008 74.10 283.90 225.20 135.20 176.65 508.15 1,598.85

96

31/12/2007 105.80 459.60 332.05 178.70 278.75 664.35 2,371.00

28/09/2007 104.55 326.60 278.20 144.30 242.20 542.70 1,950.70

29/06/2007 85.95 270.25 269.65 117.65 225.65 539.80 1,525.30

30/03/2007 76.05 215.40 194.70 103.00 187.55 471.65 992.90

29/12/2006 86.60 239.90 276.20 110.70 226.50 506.95 1,245.90

29/09/2006 95.25 288.25 284.15 110.70 271.65 526.20 1,245.90

30/06/2006 62.50 198.80 200.80 84.10 170.40 325.55 727.40

31/03/2006 80.80 230.30 266.90 96.95 235.85 471.20 968.05

30/12/2005 92.30 240.85 266.90 92.75 271.10 466.35 907.45

30/09/2005 103.80 248.95 240.55 93.75 272.40 450.55 938.60

30/06/2005 94.30 196.30 231.95 74.05 250.70 379.90 681.55

31/03/2005 108.00 218.05 200.40 76.05 310.85 393.30 656.95

31/12/2004 89.35 240.25 212.60 77.90 335.30 405.20 652.45

30/09/2004 49.65 169.00 154.95 51.85 240.95 245.05 468.20

30/06/2004 42.60 150.10 120.85 42.70 240.35 281.95 430.65

31/03/2004 50.60 242.70 144.60 42.70 240.35 333.90 605.70

DATE UCO Bank

United Bank Of India

Vijaya Bank

31/03/2009 24.00 147.25 26.20

31/12/2008 28.50 163.00 33.50

30/09/2008 34.10 143.50 36.10

30/06/2008 32.00 109.40 34.25

31/03/2008 36.95 141.00 49.65

31/12/2007 59.25 206.35 85.35

28/09/2007 47.95 163.30 70.10

29/06/2007 23.75 132.30 49.80

30/03/2007 21.40 103.90 42.50

29/12/2006 21.20 122.65 47.10

29/09/2006 22.70 136.35 56.70

30/06/2006 16.85 90.40 39.50

31/03/2006 26.55 121.85 52.55

30/12/2005 25.20 122.10 60.85

30/09/2005 30.00 134.70 63.15

30/06/2005 26.90 108.00 58.55

31/03/2005 30.30 113.05 64.30

31/12/2004 37.30 108.85 72.85

30/09/2004 18.90 73.45 46.00

30/06/2004 19.70 57.80 40.75

31/03/2004 22.25 52.70 61.45

97

Private sector banks market performance data:

DATE ICICI Bank

AXIS Bank

Yes Bank

Lakshmi Vilas Bank

Karur Vysya Bank

Development Credit Bank

Kotak Mahindra Bank

City Union Bank

31/03/2009 332.60 414.50 49.90 63.15 200.50 18.90 282.95 12.23

31/12/2008 448.35 504.65 75.15 68.55 221.05 21.60 357.30 14.55

30/09/2008 534.85 720.50 120.65 92.05 298.80 35.70 554.80 22.90

30/06/2008 630.20 603.65 114.25 73.15 295.20 46.40 461.20 23.45

98

31/03/2008 770.10 781.15 168.75 98.80 335.85 85.40 628.55 27.90

31/12/2007 1,232.40 967.10 249.05 147.75 420.40 145.10 1,296.20 400.50

28/09/2007 1,063.15 764.40 206.80 115.80 333.85 123.25 921.65 220.30

29/06/2007 955.30 605.00 179.90 76.50 313.00 105.10 672.50 211.50

30/03/2007 853.10 490.15 140.70 78.05 256.95 69.95 479.65 161.45

29/12/2006 890.40 469.05 134.85 82.95 267.50 56.55 399.40 163.25

29/09/2006 699.05 379.20 92.30 572.55 331.80 121.20

30/06/2006 487.40 266.75 78.10 491.50 242.70 92.90

31/03/2006 589.25 356.35 100.40 538.30 278.00 112.00

30/12/2005 584.70 286.35 68.55 573.10 223.80 92.95

30/09/2005 600.35 265.50 66.50 433.90 199.35 102.25

30/06/2005 421.55 247.15 62.30 407.65 391.65 88.65

31/03/2005 393.00 242.05 481.10 340.50 84.00

31/12/2004 370.75 185.20 319.85 284.30 95.30

30/09/2004 286.05 129.95 303.10 182.30 66.20

30/06/2004 244.40 129.60 315.15 347.65 79.00

31/03/2004 295.90 146.75 357.15 404.10 68.55

Foreign banks market performance data:

DATE Bank of America Corporation

Barclays Bank PLC

BNP Paribas

CITI

BANK

Deutsche Bank AG

JP Morgan Chase Bank

31/03/2009 6.82 6.15 31.12 9.44 40.65 26.58

31/12/2008 14.08 6.51 30.25 9.65 40.69 31.53

30/09/2008 35.00 15.15 66.08 10.04 72.79 46.70

99

30/06/2008 23.87 14.40 57.54 9.86 85.35 34.31

31/03/2008 37.91 18.70 63.89 10.24 113.05 42.95

31/12/2007 41.26 23.55 74.22 10.72 129.41 43.65

28/09/2007 50.27 25.55 76.74 10.92 128.39 45.82

29/06/2007 48.89 28.80 88.36 10.82 144.74 48.45

30/03/2007 51.02 30.70 78.19 10.50 134.54 48.38

29/12/2006 53.39 29.65 82.65 10.10 133.24 48.30

29/09/2006 53.57 26.30 84.85 9.80 120.70 46.96

30/06/2006 48.10 22.85 74.85 9.90 112.50 42.00

31/03/2006 45.54 23.10 76.65 114.24 41.64

30/12/2005 46.15 19.10 68.35 96.87 39.69

30/09/2005 42.10 19.65 63.25 93.52 33.93

30/06/2005 45.61 18.25 56.70 77.90 35.32

31/03/2005 44.10 19.75 54.65 86.20 34.60

31/12/2004 46.99 22.70 53.30 89.01 39.01

30/09/2004 43.33 19.55 52.00 71.94 39.73

30/06/2004 84.62 17.65 50.55 79.11 38.77

100

31/03/2004 80.98 19.05 49.73 83.48 41.95DATE The Bank Of Nova Scotia

HSBC ABN AMRO BANK

Societe Generale

31/03/2009 24.52 17.20 6.60 7.82

31/12/2008 27.20 20.56 10.56 10.40

30/09/2008 46.04 20.03 8.96 17.79

30/06/2008 45.82 22.76 16.92 17.25

31/03/2008 45.21 24.11 19.87 19.60

31/12/2007 50.50 23.47 18.15 29.05

28/09/2007 52.50 24.80 21.44 33.60

29/06/2007 48.83 25.18 23.16 36.80

30/03/2007 46.11 25.49 24.48 34.78

29/12/2006 44.80 25.69 24.25 34.05

29/09/2006 43.07 25.65 23.80 31.90

30/06/2006 39.75 24.86 21.76 29.45

31/03/2006 40.14 25.45 23.19 30.20

30/12/2005 39.62 25.98 23.69 24.50

30/09/2005 37.40 26.17 24.44 23.00

30/06/2005 33.25 26.35 24.38 20.38

31/03/2005 32.66 26.12 23.68 20.90

31/12/2004 33.85 27.17 24.50 20.45

30/09/2004 29.25 26.30 23.60 17.65

30/06/2004 26.95 25.00 21.38 17.10

31/03/2004 53.97 27.30 24.85 17.05

101

Abbreviations Used:

CRR: Cash reserve ratio

IBA: Indian Banking Association

SLR: Statutory liquid ratios

CAR: Capital Adequacy ratios

RONW: Return on net worth

NPR: Net Profit Ratios

RBI: Reserve Bank of India

Rs. Rupees

RRB's: Regional rural banks

PSB's: Public sector banks

102